US fiscal strength on course for continued decline: Moody’s
US government debt has become less affordable due to higher interest rates
[NEW YORK] Ratings agency Moody’s said on Tuesday (Mar 25) that the US’ fiscal strength is on track for a continued multi-year decline as budget deficits widen and debt becomes less affordable.
The agency said in a report that the country’s fiscal health deteriorated further since Moody’s lowered its outlook on the US triple-A rating in November 2023.
The report comes amid heightened uncertainty in US financial markets as President Donald Trump’s decision to impose punitive tariffs on key trading partners has sparked investor fears of higher price pressures and a sharp economic slowdown.
“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 said.
It projects debt to gross domestic product, a key ratio in assessing a country’s finances, will rise to around 130 per cent by 2035 from nearly 100 per cent in 2025. Debt affordability will worsen at a faster rate, with interest payments accounting for 30 per cent of revenue by 2035 from 9 per cent in 2021, it said.
Moody’s is the last among major ratings agencies to keep a top, triple-A rating for US sovereign debt, though it lowered its outlook in late 2023 due to wider fiscal deficits and higher interest debt payments.
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Fitch cut the US sovereign rating by one notch to AA+ from AAA in 2023, citing fiscal deterioration and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills. It was the second major rating agency to strip the US of its top triple-A rating, after Standard & Poor’s did so after the 2011 debt ceiling crisis.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, the lower a borrower’s rating, the higher its financing costs.
Moody’s said on Tuesday that lower US debt affordability has meant that the central role of the US dollar and the Treasury market in global financial markets has become more critical in supporting the triple-A rating.
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However, the potential negative economic impact of tariffs as well as the prospect of unfunded tax cuts complicates the picture.
“We see diminished prospects that these strengths will continue to offset widening fiscal deficits and declining debt affordability,” it said.
Republicans are pushing a US$4.5 trillion tax cut extension, but its impact on deficits remains uncertain without major spending cuts, which could clash with Trump’s pledges to protect social programmes.
Moody’s said large spending cuts that require bipartisan support in Congress will be politically difficult to implement.
Other spending cuts, such as the ones spearheaded by the newly established Department of government Efficiency, led by Elon Musk to reduce wasteful spending, are minor compared to mandatory expenditures and are unlikely to generate substantial savings in the short term.
Tariffs may offer temporary revenue support, but over time, persistently high tariffs are likely to hinder growth, counteracting their positive effect on revenues, it said. REUTERS
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