The United States’ fiscal strength has deteriorated in the past year and is headed for a multiyear decline due to increasing budget deficits and more expensive debt driven by higher interest rates, according to a Moody’s report. The latest report comes amid financial uncertainty spurred by tariffs and fears of an economic slowdown.
Moody’s was the last major rating agency to retain a top triple-A rating for U.S. sovereign debt, but it lowered its outlook to negative from stable in November 2023. The firm warned last year that elevated Treasury yields above 4% would challenge servicing the cost of U.S. debt.
Fitch cut its rating on U.S. debt by one notch to AA+ from AAA in 2023, citing fiscal deterioration and last-minute debt ceiling negotiations. Standard & Poor’s (S&P Global) had lowered its triple-A rating on U.S. debt in 2011. Typically, the lower a borrower's rating is, the higher its financing costs are.
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“Even in a very positive and low probability economic and financial scenario, debt affordability remains materially weaker than for other Aaa-rated and highly rated sovereigns,” Moody’s said.
The report foresees the debt-to-gross domestic product ratio rising to about 130% by 2035 from nearly 100% this year and interest payments accounting for 30% of revenue over the same period, compared with 9% in 2021.
“At these levels, fiscal flexibility is considerably reduced,” Moody’s said.
The agency said the role of the dollar and the Treasury bond market in global finance is increasingly critical in supporting the country’s Aaa credit profile. It warned that sustained high tariffs, unfunded tax cuts, and significant tail risks to the economy could render the U.S.'s strength of being the key player in global finance less effective in countering widening fiscal deficits and declining debt affordability.
Moody’s report also predicts the federal deficit will widen to about 8.5% of GDP by 2035, from around 6.3% in 2025, due to increased interest payments and health-related entitlement costs. Despite the current challenges, Moody’s expects the U.S. economy to remain strong and resilient.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
