U.S. Debt Ranking Downgraded from Triple A by Moody's
Trump's Economy Takes a Hit:
In a major setback for former President Donald Trump's economic policy, credit rating agency Moody's downgraded the US credit rating last Friday, amid easing tensions from his trade war, notably with China. This is the first time in history that Moody's has removed the maximum Aaa rating and downgraded it to Aa1, with a stable outlook.
Moody's decision was mainly due to the surge in US debt and its impact on the federal budget. The rise in federal deficits and the increasing interest payments on the debt were the major factors leading to the downgrade.
The White House responded to the report with Steven Cheung, the director of communications, lashing out at Mark Zandi, the chief economist at Moody's Analytics. Cheung deemed Zandi's analyses as unreliable.
Moody's stated that multiple governments and elected officials have failed to agree on measures to stem the rise in deficits. They believe that spending cuts and deficit reduction cannot be achieved with the current budget proposal.
The downfall of the bill aiming to solidify tax credits' extension before they expire at the end of the year and the $880 billion in budget cuts affecting 70 million low-income Americans' healthcare programs was another controversial issue in Congress. The Republican Party's division over the issue complicates the process, casting doubt on whether this project will be reviewed by the House of Representatives next week.
Despite Trump's calls on his Truth Social network, five Republican lawmakers aligned with Democrats to reject the bill before the House Budget Committee.
Although the U.S. economy faces deteriorating budget prospects, it still remains lucrative due to its depth, high income generation, strong potential growth, and innovative capabilities. Moody's advises the government to implement fiscal reforms to slow down and potentially reverse the deterioration of public debt and deficits by increasing revenues or reducing expenditures.
This downgrade made Moody's the last of the three major rating agencies to not downgrade U.S. debt. Fitch had downgraded it to AA+ in 2023, citing repeated political crises over the debt ceiling that risked eroding the nation's governance. Standard and Poor's Global Ratings downgraded the US to AA+ in 2011 and has not raised the rating since.
Behind the Downgrade:
Moody's downgrade primarily resulted from a worsening fiscal outlook marked by rising federal deficits and escalating interest payment burdens. Key reasons include:
- Deteriorating Fiscal Outlook: Moody's expects U.S. federal deficits to increase substantially over the next decade, with deficits growing from 6.4% of GDP in 2024 to nearly 9% by 2035. This rise is driven significantly by entitlement spending such as Medicare and Social Security, which is growing due to an aging population, along with higher interest costs on the national debt.
- Growing Interest Payments: By 2035, mandatory spending, including interest, is expected to consume around 78% of total federal expenditures, up from about 73% in the current year.
- Political Gridlock and Dysfunction: Moody's highlighted the sustained failure of successive U.S. administrations and Congress to address the growing fiscal challenges. The agency pointed to increasing political polarization and legislative gridlock, where Republicans resist tax increases and Democrats resist spending cuts, undermining efforts to reduce deficits and manage debt.
- Tax Policy Impact: The potential extension of the 2017 Tax Cuts and Jobs Act, favored by the Republican-controlled House, is expected to add approximately $4 trillion to the deficit over the next decade, posing a significant fiscal risk that would further exacerbate the deficit and debt situation.
- The primary cause of Moody's downgrade was a worsening fiscal outlook, characterized by rising federal deficits and escalating interest payment burdens, exacerbated by factors such as political gridlock and dysfunction.
- Moody's highlighted the sustained failure of successive U.S. administrations and Congress to address the growing fiscal challenges, as increased political polarization and legislative gridlock preclude efforts to reduce deficits and manage debt, while the potential extension of the 2017 Tax Cuts and Jobs Act could add significantly to the deficit and worsen the fiscal situation.
