With a government shutdown looming and a federal deficit that continues to climb, the bond rating firm Moody’s on Friday lowered its outlook for U.S. Treasury debt to “negative” from “stable.”
The change is a signal that Moody’s, the only one of the three major credit ratings agencies that still considers U.S. debt worthy of its top rating, may soon apply a downgrade.
The ratings firm confirmed that for now, its current top rating of Aaa still applies, and that the U.S. economy retains many advantages and strengths. However, in a gloomy assessment of the federal government’s capacity to address looming fiscal problems, the company warned of troubles to come.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody's expects that the U.S.'s fiscal deficits will remain very large, significantly weakening debt affordability,” the company said in a statement accompanying the announcement. “Continued political polarization within [the] U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
The news is likely to increase the volume of calls for the federal government to establish a “fiscal commission” of experts who would have the task of assembling a plan to adjust federal spending and the tax code to meet the country’s current needs.
Interest rate changes
The change by Moody’s reflects, in part, the reality that the era of near-zero interest rates, which allowed the government to borrow relatively painlessly, is now over, and that the relative cost of continued deficit spending — in which the U.S. borrows to pay for annual spending that exceeds revenues — is rising sharply.
Under its current projections, the company said, by 2033 the interest payments alone on U.S. debt will be equal to 26% of federal revenues, up from 9.7% in 2022.
Moody’s growing pessimism about the future sustainability of the United States’ nearly $34 trillion in outstanding debt echoes that of other ratings firms.
Until recently, Standard & Poor’s had been the outlier among ratings firms. S&P downgraded the U.S. from AAA to AA+ during a fiscal crisis in 2011 and has maintained that level since. In August, the Fitch Ratings agency joined S&P, downgrading U.S. debt from its top rating of AAA to AA+.
“Moody’s downgrade was entirely predictable considering the nation’s fiscal condition and budgetary mismanagement,” Stephen Ellis, president of the watchdog group Taxpayers for Common Sense, told VOA in an email exchange. “When you’re paying nearly $660 billion a year to service $33.7 trillion in debt, lurching from budgetary crisis to budgetary crisis is policymaker malpractice. Once again, the country is veering toward another government shutdown that is entirely preventable.”
Inflection point
While the rate of growth of the government’s debt has not changed dramatically, some observers wonder if Moody’s announcement, combined with the increased likelihood that interest rates are likely to remain elevated above recent levels for an extended period of time, could mark a turning point for the country.
“There's a chance that a couple of years from now, we'll look back on this period as when the debt and the deficit again became a political concern, which it hasn't been for some time,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
“There seems to be a lot more angst about it, in part because long-term yields have gone up so much,” Wessel told VOA. “And in that environment, every warning from a rating agency or surprising poll finding or some unexpected comment by a dovish economist, tends to get more attention — and for good reason.”
Fiscal commission pondered
The Moody’s announcement has some deficit watchdogs renewing calls for the creation of a “fiscal commission” empowered to come up with a plan to address the nation’s revenues and spending.
In September, a bipartisan group of lawmakers in Washington introduced legislation that would create such a body. It would be made up of 16 members, including six members each from the House of Representatives and the Senate, divided evenly between the parties. The remaining four members would be outside experts, two appointed by Democrats and two by Republicans.
The commission’s mandate would be to develop a plan to stabilize the country’s debt-to-GDP ratio at or below 100% within 10 years, to recommend changes to keep federal programs like Medicare and Social Security solvent, and to consider changes to federal spending and revenue collections necessary to reach those goals.
Under the proposal, if a bipartisan majority of the committee’s members approve a set of final recommendations, the plan would be guaranteed an up-or-down vote in both houses of Congress, with no possibility of amendment.
Best chance
“A fiscal commission is absolutely the best chance we have of getting anything done right now,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Because it gives politicians a chance to build relationships and trust with each other and really study the issue, and understand how difficult it is instead of the kind of free lunch storylines they tell themselves.”
There is some precedent for the creation of such a commission.
In 2010, then-President Barack Obama created the National Commission on Fiscal Responsibility and Reform to undertake a similar task. More popularly known as the Simpson-Bowles Commission for its co-chairs Alan Simpson and Erskine Bowles, the group formulated a comprehensive overhaul of U.S. spending, including entitlement programs, as well as the tax code.
However, the commission was unable to achieve a two-thirds supermajority among its members, and the plan was therefore never officially endorsed. A bill largely based on the plan was introduced in the House of Representatives, where it was soundly defeated.
MacGuineas told VOA that a commission “has a good shot” at success, even though it would face an even tougher task than Simpson-Bowles did.
“Today, the fiscal situation is worse, and the political situation is worse,” MacGuineas said.
