US debt dynamics ‘inconsistent with AAA rating,’: Moody’s
THE next US administration “must grapple with widening budget deficits”, warned Moody’s Ratings in a report published on Tuesday (Sep 24), nearly a year after it announced a negative outlook for the country’s sovereign credit profile.
“The administration’s tax and spending policies will affect the size of future budget deficits and the expected decline in US fiscal strength, which could have a significant effect on the US sovereign credit profile,” analysts led by Claire Li and William Foster wrote in the report.
After the races for Congress and the White House in November conclude, Moody’s said it anticipates “the US government will remain divided, preventing sweeping fiscal reforms by the new administration.
“As a result, fiscal policy proposals by both candidates will likely require intense bipartisan negotiations and compromise”.
The report stressed the importance of “fiscal strength” in rating decisions.
“US fiscal strength will materially weaken in the absence of meaningful policy steps to reduce the fiscal deficit, rein in new borrowing to fund those deficits and slow the rise in interest expense that consumes an increasingly large share of government revenues.”
The report concluded: “These debt dynamics would be increasingly unsustainable and inconsistent with an AAA rating if no policy actions are taken to course correct.”
Last November, Moody’s lowered the US sovereign outlook to negative from stable while affirming the nation’s rating at AAA, the highest investment-grade notch.
Moody’s is the only one of the three main credit companies with a top rating on the US after Fitch Ratings downgraded the US government in August 2023 after another debt-ceiling battle in Congress. S&P Global Ratings stripped the US of its top score in 2011 amid that year’s debt-limit crisis.
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The US AAA rating could well rest on how a new Congress deals with the 2017 Tax Cuts and Jobs Act (TCJA). Moody’s forecast that the TCJA will be extended given likely political resistance, and said that should a new Congress allowed them to expire, “it would result in a material increase to our estimates of revenue intake and a narrowing of our fiscal deficit projections.”
The expiration of the Federal debt limit suspension looms at the start of next year, and Moody’s warned, “political brinkmanship over the debt limit has typically been more disruptive during periods of divided government”.
They said “resolving the debt limit to finance fiscal deficits and maintain financial market stability will be critical for the US sovereign,” given a backdrop of “around US$28 trillion in outstanding federal debt, persistent large fiscal deficits of over 6 per cent of GDP and net interest payments due on federal debt that will likely exceed US$1 trillion, (around 3 per cent of GDP) per year”.
Moody’s said it expects “that the US government will ultimately resolve any debt limit disputes and continue to pay its obligations on time and in full”.
Moody’s highlighted a number of key issues in the report, such as:
• While the independence of the Federal Reserve and its interest rate policy has surfaced as an issue during the presidential campaign, Moody’s said it “sees little evidence that political considerations factor into the central bank’s “independent decision-making”;
• US Trade policy is seen likely maintaining “a protectionist stance,” and “fuel a shift towards domestic industrial policies”;
• “Social challenges related to immigration will persist,” and tighter polices “could raise labour costs in sectors reliant on foreign-born workers, such as agriculture, healthcare and construction”; and
• A divided Congress “could slow the pace of transition to a lower-carbon economy”. However, the rating agency said “private sector direction, state mandates and consumer preferences will keep it chugging along”. BLOOMBERG
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