US Fiscal Profile Expected to Deteriorate Under Next Administration, Moody’s Reports

By Davide Barbuscia

NEW YORK – According to ratings agency Moody’s, the fiscal health of the U.S. is projected to decline further due to significant political polarization, which complicates efforts for any incoming presidential administration to take necessary actions to mitigate national debt.

Moody’s anticipates that the U.S. fiscal profile will deteriorate under either candidate in the upcoming presidential election on November 5, whether it be Democrat Kamala Harris or Republican Donald Trump. In a report released on Tuesday, the agency noted, "The incoming administration will confront a worsening U.S. fiscal outlook, as decreasing debt affordability will gradually erode fiscal strength. Without policy measures to address these trends and limit fiscal deficits, the declining fiscal strength will increasingly impact the U.S. sovereign credit profile."

In November 2023, Moody’s shifted the outlook on its triple-A credit rating for the U.S. to "negative" from "stable," following a rating downgrade earlier in the year by another agency, Fitch. This downgrade stemmed from political tensions surrounding the raising of the U.S. debt ceiling.

Currently, Moody’s is the last of the three major credit rating agencies maintaining a top rating for the U.S. government. Fitch downgraded its rating from triple-A to AA+ in August 2023, joining Standard & Poor’s, which has held an AA+ rating since 2011.

Moody’s projections indicate that the U.S. is likely to experience fiscal deficits around 7% of gross domestic product annually over the next five years, potentially rising to 9% by 2034. This would lead to an increase in the debt burden from 97% of GDP last year to approximately 130% by that time.

The agency warned that "U.S. fiscal strength will significantly deteriorate without substantial policy interventions to lessen the fiscal deficit, limit new borrowing, and slow the growth in interest expenses, which increasingly consume government revenues." It further cautioned that such debt dynamics would become unsustainable, making it inconsistent with an Aaa rating if no corrective actions are taken.

Fitch also mentioned last month that the U.S. fiscal landscape is likely to remain stable regardless of the election outcome in November.

Regarding the broader fiscal outlook, Moody’s pointed out that the composition of Congress, determined in the November elections, will be critical. The current divided Congress – with Republicans narrowly controlling the House and Democrats holding the Senate – could impede an incoming administration’s ability to enact legislation.

Moody’s expressed that the government will likely remain divided, preventing significant fiscal reforms under the new administration. Consequently, the fiscal policy proposals from both candidates will require extensive bipartisan negotiation and compromise.

Additionally, a clear victory for either party could usher in major policy shifts that would significantly impact economic growth and the credit rating of both public and private sector entities. The agency highlighted that potential credit risks include abrupt changes in tax, trade, investment, immigration, and climate policies.

Trump recently voiced that U.S. presidents should have input over decisions made by the Federal Reserve, suggesting a possible deviation from traditional policies concerning central bank independence. Moody’s remarked that such political interference in monetary policy decisions could be detrimental to credit ratings and could adversely affect investor confidence in U.S. financial markets.

Moreover, any erosion of institutional strength may undermine confidence and hinder the implementation of countercyclical policies, negatively impacting overall growth, financial markets, and the environment for debt issuers.