Moody's downgrades US credit rating to Aa1 amid fiscal strains

According to Moody’s, the downgrade reflects a decade-long trend of large fiscal deficits and political gridlock, which has prevented successive US administrations and Congress from agreeing on measures to reduce spending or increase revenues. The agency expressed scepticism that current fiscal proposals will lead to any material multi-year reductions in mandatory spending or deficits.

Without significant policy changes, the federal deficit may widen from 6.4 per cent of GDP in 2024 to nearly 9 per cent by 2035, driven by rising entitlement spending and increasing interest payments on debt, while revenues remain broadly flat. The federal debt burden is expected to surge from 98 per cent of GDP this year to about 134 per cent by 2035, Moody’s said in a press release.

Debt affordability is also under severe pressure. Moody’s noted that federal interest payments are likely to consume around 30 per cent of government revenue by 2035, up sharply from 18 per cent in 2024 and just 9 per cent in 2021. In comparison, the general government interest burden—accounting for federal, state, and local debt—stood at 12 per cent of revenue in 2024, significantly higher than the 1.6 per cent average for Aaa-rated sovereigns.

The report highlighted that if the 2017 Tax Cuts and Jobs Act is extended—Moody’s base case—it will add approximately $4 trillion to the federal fiscal primary deficit over the next decade. At the same time, mandatory spending, including interest expenses, is projected to rise from about 73 per cent of total spending in 2024 to around 78 per cent by 2035, further limiting budget flexibility.

Despite these fiscal pressures, Moody’s assigned a stable outlook, citing the US economy’s unparalleled scale, resilience, and global financial dominance. The country’s unique economic strengths include high average incomes, strong growth potential, and a robust track record of innovation that supports productivity and GDP growth. While near-term growth may moderate due to higher tariffs, Moody’s does not expect long-term growth prospects to be significantly affected.

A critical factor underpinning the US rating is the continued dominance of the US dollar as the world’s primary reserve currency, which provides extraordinary funding capacity and allows the government to finance large deficits and refinance debt at relatively moderate and predictable costs. Although global central banks have diversified their reserves in recent years, Moody’s expects the US dollar to maintain its dominant reserve currency status for the foreseeable future.

The agency confirmed that the US’ long-term local- and foreign-currency country ceilings remain at Aaa, supported by a small government footprint in the economy, extremely low risks of currency and balance of payments crises, and strong policy effectiveness.

Fibre2Fashion News Desk (KD)