Moody's Investors Service has downgraded the outlook for the U.S. government's credit rating from stable to negative on November 10, while maintaining its long-term issuer and senior unsecured ratings at AAA. The downgrade reflects concerns over the U.S. government's failure to address fiscal deficits amid rising interest rates, increasing the risks to the nation's finances.
Since 2000, U.S. debt has been on a steady rise, exacerbated by major global events such as the Afghanistan War, the 2008 financial crisis, and the COVID-19 pandemic. Between the 2019 and 2021 fiscal years, U.S. fiscal spending surged by approximately 50%.
As of 2023, the U.S. federal government's debt stands at a staggering $33.17 trillion. Economists often measure the severity of a nation's debt by its ratio to GDP. According to the Economic Development Committee of the World Business Council, a healthy level for the U.S. would be a debt-to-GDP ratio of 70%.
Currently, the U.S. debt-to-GDP ratio is at 123%. As of September 2023, the federal government is spending $879 billion to maintain its debt costs, accounting for 14% of federal expenditures.
The rising interest rates and ongoing inflation have led to increasing debt interest, limiting the government's ability to repay its debts. Since March 2022, the Federal Reserve has raised interest rates 11 times, with the federal funds rate currently between 5.25% and 5.50%.
Since 2001, the U.S. government's annual expenditures have consistently exceeded its income, necessitating borrowing to cover the shortfall. Despite this, U.S. Treasury Deputy Secretary Wally Adeyemo remains confident in the U.S. economy, asserting that U.S. government bonds are the world's safest and most liquid assets.
The issue of debt has become a contentious topic within the U.S. government. Despite mutual accusations between Democrats and Republicans over the growing national debt, data shows that the debt has steadily increased regardless of which party occupies the White House.
The debt ceiling, the government's self-imposed limit on borrowing, has been permanently raised, temporarily extended, or redefined 78 times since 1960. In 2021, the U.S. adjusted its debt ceiling to $31.38 trillion, but by January 2023, the debt had already reached this limit.
Moody's cites political polarization in Congress as a significant factor in the downgrade, noting that ongoing polarization has prevented governments from reaching consensus on fiscal plans to alleviate debt pressures.
As Moody's issues its warning, a 45-day temporary spending bill is set to expire next Friday, posing another risk of a government shutdown. At the end of September, Congress faced a similar risk over disagreements on the 2024 federal government spending bill.
Moody's is the last of the three major international rating agencies to maintain the U.S. government's highest rating. Fitch downgraded the U.S. government's rating from AAA to AA+ in August, while Standard & Poor's has rated the U.S. government at AA+ since 2011.
Despite the downgrade in outlook, Moody's still maintains the U.S. long-term issuer and senior unsecured rating at AAA. The agency believes that U.S. economic growth will offset the rising costs of its debt and that the country's institutional and governance strength will aid in effectively repaying its debts.
Treasury Deputy Secretary Adeyemo acknowledges the AAA rating but disagrees with Moody's decision to downgrade the U.S. government's outlook to negative.
This year, U.S. government bond yields have risen sharply, increasing the pressure on the nation's debt burden. Moody's warns that without new policies, the U.S.'s debt-bearing capacity will further decline significantly, with the federal government continuing to maintain a substantial fiscal deficit of around 6% of GDP in the short term, expected to reach about 8% by 2033.
