Influence Alley

Moody’s Investor Service warned Washington Wednesday not to rest on its haunches after its New Year’s Day passage of legislation to avert the fiscal cliff, arguing more work must be done to meaningfully lower the U.S. debt trajectory and prevent the risk of a downgrade of the U.S. debt.

The credit rating agency issued a note analyzing the impact of the fiscal package agreed to Tuesday, crediting it for taking measures to head off an anticipated recession, but criticizing it for key shortfalls.

“The recent package mitigates part of the fiscal drag on the economy associated with the fiscal cliff but does not eliminate it,” the rating agency said.

Namely, Moody’s lamented that the fiscal cliff deal fails to provide “meaningful improvement in the government’s debt ratios over the medium term” and fails to address the U.S. borrowing authority, which hit its limit earlier this week and is projected to need an increase within the next couple of months once “extraordinary” measures to keep Treasury payments going, have run out.

The rating agency issued a reminder that its outlook for the U.S. credit rating remains negative, and could be downgraded from triple-A if Congress’ next fiscal moves lack further deficit-reduction measures.

(A different credit rating agency -- Standard & Poor’s -- downgraded the U.S. a notch from triple-A, during the historic protracted debt ceiling debate in August 2011.)

The rating agency also pointed out that the latest fiscal package raises some revenue through higher tax rates on individuals making more than $400,000 and families earning $450,000, but said that the structure of the package ultimately cancels out such savings.

“The estimated amount of increased revenue over the next decade is far outweighed by the amount of revenue foregone through the extension of lower tax rates for those with incomes below $400,000, the indexation of the alternative minimum tax, and other measures,” said the Moody’s report.