Moody’s Might Downgrade US Credit After the Election

With a vote in the House starting to clear the way for a federal budget extension, keeping the government open until at least December 20, would seem yet another fiscal disruption has been avoided. But perhaps not soon or well enough to prevent another credit downgrade.

The legislation may have passed by 341 to 82, with the Senate expected to have passed it by Thursday. However, Moody’s on Tuesday published an analysis that credit effects depend on the policies enacted after the presidential election and the makeup of the incoming government.

“Credit risks lie in the possibility of abrupt and disruptive changes to tax, trade and investment, immigration and climate policies among other areas,” the company wrote.

At the top of the list are widening budget deficits. Whoever wins faces developing tax and spending policies that will face heavy scrutiny and result in a “significant effect” on U.S. credit ratings. If the next and future governments don’t practically address the increasing gulf between income and spending, the fiscal conditions including the growing percentage of government spending that interest payments take — “would be increasingly unsustainable” and unable to support the current Aaa credit rating from Moody’s.

Moody’s is the last of the three largest credit rating agencies that have yet to downgrade U.S. credit. S&P Global Ratings kicked the U.S. down from its top rating in 2011 during the debt ceiling crisis then. Fitch Ratings cut its credit level after 2023’s debt ceiling crisis.

Moody’s already shifted the outlook, not the rating, in October 2023, “to reflect the increased risks to US fiscal strength.”

Without significant material changes, Moody’s expects to see average federal deficits of 7% of GDP in each of the next five years, with that number expanding to 9% by 2034. That would make the current public debt 130% of GDP in that year, up from 97% in 2023. By 2034, federal interest payments would rise to 30% of revenues and 5% of GDP. In 2023, the respective numbers were 14% and 2.4%.

Moody’s expects Congress to extend the 2017 Tax Cuts and Jobs Act changes to the tax code, which would make federal revenue 1% of GDP lower per year. Should the TCJA law expire, there would be a “material increase” in tax revenue and smaller fiscal deficit projections.

Another result would be a 10-year Treasury yield of 4% from 2025 onward. Under current projections, that yield wouldn’t come about until August 2027.