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Moody's dims credit outlook for U.S. federal government

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Brett Rowland

(The Center Square) – The last of the Big Three credit-rating agencies to keep the federal government's credit at AAA has put lawmakers on notice. 

Moody's Investors Service gave the federal government a negative outlook citing large deficits, high interest rates and waning political interest in addressing the nation's deficit. 

"The key driver of the outlook change to negative is Moody's assessment that the downside risks to the US' fiscal strength have increased and may no longer be fully offset by the sovereign's unique credit strengths," the authors wrote of the decision. "In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the US' fiscal deficits will remain very large, significantly weakening debt affordability."

Moody's also made it clear it has less faith in lawmakers to fix things.

"Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability," according to the report.

Moody's affirmed the nation's AAA credit rating.

"The affirmation of the AAA ratings reflects Moody's view that the US' formidable credit strengths continue to preserve the sovereign's credit profile," according to the report. "The unique and central roles of the US dollar and Treasury bond market in the global financial system provide extraordinary funding capacity and significantly reduce the risk of a sudden spiraling of funding costs, which is particularly relevant in the context of high debt levels and weakening debt affordability."

The other two credit-rating agencies, S&P Global and Fitch, grade U.S. credit at AA+. In August, Fitch Ratings made the decision to downgrade the government's credit rating from the highest level of AAA down one tier to AA+. Fitch pointed to the U.S. government’s high national debt and deficits and an "erosion of governance."

The nation's growing debt is costing taxpayers and the cost of borrowing money is taking up a larger share of the federal budget, which along with the rising costs of Social Security and Medicare, are driving up the national deficit.

Interest costs on the country's $33 trillion debt increased 23 percent to $879 billion. That's a record high. Interest costs accounted for 14 percent of total federal spending as of September 2023. The cost of maintaining that debt is expected to grow. The Congressional Budget Office released projections in June that showed interest costs would "exceed all mandatory spending other than that for the major health care programs and Social Security by 2027, all discretionary outlays by 2047, and all spending on Social Security by 2051."

The U.S. posted a $1.7 trillion deficit for the 2023 fiscal year.

In February, the U.S. Government Accountability Office's audit of the federal government's financial statements found it "continues to face an unsustainable long-term fiscal path."

House Speaker Mike Johnson, R-La., has called for a bipartisan debt commission to look at ways to address the nation's deficit. However, the U.S. House and Senate remain far apart on spending plans for next year. 

The Republican-majority House wants to spend 7.5 percent below the Fiscal Responsibility Act levels, while the Democrat-majority Senate is 2.3 percent above, according to the Committee for a Responsible Federal Budget.

"This does not account for various rescissions and phony spending cuts, which would bring the House's effective spending levels closer to the FRA and the Senate's further above it," according to a report from the Committee for a Responsible Federal Budget.