Moody's Downgrades US Government Rating Amid Rising Debt Concerns

US Government Rating Downgraded

Moody's Ratings has lowered the long-term issuer and senior unsecured ratings of the United States government from Aaa to Aa1. This downgrade, representing a one-notch decrease on Moody's 21-point scale, arises from worries regarding the escalating federal debt and interest obligations, which have surged notably over the last ten years.

Concerns Over Fiscal Management

The rating agency indicated that this decision highlights the ongoing inability of various US administrations and Congress to implement strategies that could mitigate the trend of substantial and ongoing fiscal deficits.

Moody's stated, "The lack of consensus among successive US administrations and Congress on reversing the trend of significant annual fiscal deficits and increasing interest costs is concerning. We do not anticipate that the current fiscal proposals will lead to significant multi-year reductions in mandatory spending and deficits."

Future Projections for US Fiscal Policy

The agency pointed out that the federal government has been increasing its spending while revenues have decreased due to tax reductions. This situation has resulted in escalating deficits and debt levels. Moody's predicts that the US will continue to experience large fiscal deficits in the coming decade, especially as entitlement spending rises and revenue growth stagnates.

If the 2017 Tax Cuts and Jobs Act is extended, as assumed by Moody's, it could potentially add around $4 trillion to the federal primary deficit (excluding interest payments) over the next ten years. By 2035, mandatory spending, including interest, is expected to account for approximately 78% of total federal expenditure, up from 73% in 2024.

Outlook and Economic Strengths

Despite the downgrade, Moody's has assigned a stable outlook, recognizing balanced risks at the Aa1 level. The agency acknowledged several strengths that bolster the US economy, including its vast size, resilience, high average incomes, and a strong history of innovation.

Additionally, the role of the US dollar as the leading global reserve currency enhances the government's financing capabilities, even amid high deficits. Moody's believes that the US will retain its institutional strengths, such as the constitutional separation of powers and an effective, independent monetary policy managed by the Federal Reserve.

Potential for Future Rating Changes

Looking ahead, Moody's indicated that a return to fiscal discipline through increased revenues or reduced spending could result in a rating upgrade. Conversely, a rapid deterioration in debt metrics or a sudden loss of confidence in the US dollar could lead to another downgrade. However, the agency considers such a scenario unlikely, as there is currently no viable alternative to the US dollar as a global reserve currency.