Moody’s Warns Growing Deficits Could Take a Toll on US Credit Rating

Political polarization could make it more difficult for the next administration in Washington to address the country’s deteriorating fiscal situation, and that may have negative implications for the U.S. credit rating, analysts at Moody’s Ratings warned Tuesday.

Government officials need to agree upon and execute a plan to address the growing budget deficit, rising interest payments and mounting debt, Moody’s said, but political divisions may interfere with their ability to do so. If policymakers fail to take steps to lower the deficit and rein in new borrowing, the “debt dynamics would be increasingly unsustainable and inconsistent with a Aaa rating,” the analysts said, referring to the firm’s highest credit rating, which is currently maintained by the U.S.

In November 2023, Moody’s lowered the outlook for the U.S. from “stable” to “negative,” citing both rising debt costs and the inability of American politicians to successfully address the problem. Now, Moody’s analysts say they are waiting to see how the new administration and the new Congress work together on fiscal issues before making any changes to the nation’s sovereign rating.

“Over the long term, if fiscal policy does not respond to widening deficits, that would put increasing pressure on the triple A rating,” William Foster, one of the Moody’s analysts, told Bloomberg. “Fiscal policy is front and center here ... that’s why it’s important to focus on fiscal policy response now.”

One major issue for the new administration will be the pending expiration of some key provisions of the 2017 Tax Cuts and Jobs Act. “We look at that as a potential lever to improve the fiscal outlook with regard to revenues in particular and will be closely watching that,” the analysts wrote. At the same time, the analysts said they see an extension of the tax cuts as the most likely outcome.

Another important issue is the federal debt limit, which is currently suspended but will come back into effect at the beginning of 2025. The analysts note that “political brinkmanship” has been more pronounced and disruptive under divided government, which they expect to continue after the election, making negotiations and compromise essential. “With around $28 trillion in outstanding federal debt held by the public, persistent large fiscal deficits of over 6% of GDP and net interest payments due on federal debt that will likely exceed $1 trillion (around 3% of GDP) per year, resolving the debt limit to finance fiscal deficits and maintain financial market stability will be critical for the US sovereign,” the analysts write.

The bottom line: The next administration will face serious fiscal challenges in a difficult political environment. “The incoming administration will face a deteriorating U.S. fiscal outlook, as declining debt affordability will gradually weaken U.S. fiscal strength,” the Moody’s analysts write. “In the absence of policy measures that can curb these trends and help limit fiscal deficits, deteriorating fiscal strength will increasingly weigh on the U.S. sovereign credit profile.”