Moody’s cuts US rating to Aa1, cites debt and governance issues

Moody’s Ratings downgraded the United States government’s top credit rating Friday, citing previous governments’ failure to stem a rising tide of debt.

Moody’s downgraded the rating from gold-standard Aaa to Aa1, but said that the US “retains exceptional credit strengths such as the size, resilience, and dynamism of its economy and the role of the US dollar as a global reserve currency.”

The downgrading to Aa1 from Aaa adds to the bad news for US President Donald Trump, who saw his centrepiece spending measure fail to win a critical vote in Congress due to opposition from many Republican fiscal conservatives.

Explaining its decision, the ratings agency noted “the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”

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Moody’s warned it expects federal deficits to widen to almost nine percent of economic output by 2035, up from 6.4 percent last year, “driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation.”

As a result, it expects the federal debt burden to increase to about 134 percent of gross domestic product (GDP) by 2035, compared to 98 percent last year.

Moody’s is the last of the three major rating agencies to lower the federal government’s credit. Standard & Poor’s downgraded federal debt in 2011 and Fitch Ratings followed in 2023.

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Extending President Trump’s 2017 tax cuts, a priority of the Republican-controlled Congress, Moody’s said, would add $4 trillion over the next decade to the federal primary deficit (which does not include interest payments).

A gridlocked political system has been unable to tackle America’s huge deficits. Republicans reject tax increases, and Democrats are reluctant to cut spending.

On Friday, House Republicans failed to push a big package of tax breaks and spending cuts through the Budget Committee. A small group of hard-right Republican lawmakers, insisting on steeper cuts to Medicaid and President Joe Biden’s green energy tax breaks, joined all Democrats in opposing it.

The White House took to X to push back, with communications director Steven Cheung calling one of the Moody report’s authors “an Obama advisor and (Hillary) Clinton donor who has been a Never Trumper since 2016.”

“Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again,” Cheung posted.

‘Fiscal house is not in order’

Moody’s decision to downgrade the United States from its top credit rating mirrors similar decisions from the two other major US ratings agencies, S&P and Fitch.

S&P was the first to cut its rating for the United States back in 2011, during Barack Obama’s first term in office, citing its concerns that a debt management plan “would be necessary to stabilize the government’s medium-term debt dynamics.”

Twelve years later, Fitch followed suit, warning of “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.”

Moody’s echoed its peers in its decision Friday, noting in a statement that “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” it added, flagging that it expected larger deficits to continue over the next decade.

America’s “fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns,” Moody’s said.