The U.S. government’s fiscal strength is deteriorating as the trend of larger budget deficits and mounting debt continues, Moody’s Ratings said in a report released Tuesday.
Moody’s said that America’s fiscal health has worsened in the time since it lowered its outlook on the country’s AAA credit rating in November 2023. Fitch cut the U.S. credit rating one tier from AAA to AA+ in 2023 over fiscal challenges and debt limit brinksmanship, while Standard and Poor’s did so after the 2011 debt limit crisis that spurred a partial government shutdown.
The ratings agency is the last of the major ratings agencies to keep U.S. sovereign debt at its top level, AAA, though it took a more pessimistic view of the government’s debt in 2023 due to wider annual deficits and higher interest payments on the national debt.
“Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other AAA-rated and highly rated sovereigns,” Moody’s wrote.
FEDERAL BUDGET DEFICIT HITS RECORD $1.1T IN FIRST 5 MONTHS OF FISCAL YEAR
The firm projects that the ratio of public debt to gross domestic product (GDP), a metric favored by economists in assessing government debt relative to the size of the economy, will rise from nearly 100% in 2025 to about 130% in 2035.
Debt affordability is expected to worsen at a faster rate, with interest payments accounting for 30% of revenue by 2035 – a dramatic increase from 9% in 2021, Moody’s wrote.
The firm explained that lower U.S. debt affordability meant that the central roles played by the dollar and the Treasury market in global financial markets have become more critical in supporting the AAA rating.
BILLIONAIRE HEDGE FUND MANAGER WARNS OF ‘ECONOMIC HEART ATTACK’ FOR US ECONOMY
However, changes in fiscal policy complicate that outlook, as the Trump administration and congressional Republicans pursue a tax cut package that would extend expiring 2017 tax cuts and could widen the deficit further if not offset by significant spending cuts.
“We see diminished prospects that these strengths will continue to offset widening fiscal deficits and declining debt affordability,” Moody’s said.
NEW BUDGET PROJECTIONS SHOW US HITTING DEBT RECORD IN 4 YEARS: CBO
The firm said that large spending cuts would be difficult to implement because of the need for bipartisan support, which would cut against many Republican and Democratic politicians’ pledges to leave mandatory spending programs like Social Security and Medicare untouched.
Other spending cuts, like those pushed by the Elon Musk-led Department of Government Efficiency (DOGE), have minor impact on the budget compared to mandatory spending programs and aren’t likely to yield substantial short-term savings.
Additionally, President Donald Trump’s tariff plans could bring negative economic consequences.
While tariffs could temporarily lift revenue, if persistently high tariffs remain in place over time they’re likely to hinder economic growth, counteracting their positive effect on revenues, Moody’s said.
Reuters contributed to this report.
