- Moody’s, the last major credit rating agency to maintain the U.S.’s top global rating, is warning that U.S. credit may be downgraded after the presidential election.
- The agency highlighted the growing budget deficit, which it predicts will reach an average of 7% of GDP over the next five years, before rising to 9% by 2034.
- Without significant changes in tax and spending policies, the U.S. may struggle to maintain its AAA rating, with federal interest payments set to reach 30% of revenues by 2034.
As the U.S. government moves closer to passing a budget extension that will keep the government operational until at least December 20th, Moody’s Investors Service is raising alarms about the nation’s long-term fiscal outlook.
As reported in GlobeSt, the agency—the last of the “Big Three” credit rating agencies to maintain a perfect AAA rating for the U.S.—signaled that a downgrade could follow the 2024 presidential election if deficits and debt management are not addressed.
Fiscal Warning
In a report published on Tuesday, Moody’s outlined that while the immediate threat of a government shutdown has been averted, larger fiscal concerns remain unresolved.
The agency pointed to widening budget deficits and the growing share of government spending allocated to interest payments on debt as significant risks to U.S. creditworthiness.
According to Moody’s, the incoming government’s future tax, spending, and policy decisions will have a “significant effect” on the country’s credit rating.
If those decisions fail to bridge the gap between federal income and spending, Moody’s warned that fiscal conditions would become “increasingly unsustainable.”
Rising Deficits, Debt
Moody’s expects federal deficits to average 7% of GDP annually over the next five years and rise to 9% by 2034. By then, the U.S. public debt is forecasted to balloon to 130% of GDP, up from 97% in 2023.
Interest payments on the national debt are also projected to rise sharply, reaching 30% of federal revenues and 5% of GDP by 2034.
Potential Policy Impacts
One key factor influencing the fiscal outlook is the potential extension of the 2017 Tax Cuts and Jobs Act (TCJA), which would reduce federal revenue by 1% of GDP annually.
If the TCJA provisions expire, it could lead to higher tax revenue and potentially smaller budget deficits.
However, if current fiscal trends continue, Moody’s predicts that yields on 10-year Treasury bonds could hit 4% by 2025, significantly earlier than current projections suggest.
