As Congress debated Trump's tax cuts with the "Big Beautiful Bill," the credit rating agency Moody's delivered another coup to the U.S. government. Last Friday, Moody's decided to downgrade the U.S. government's credit rating from Aaa to Aa1. This is significant not simply because of the U.S.' economic clout or that Aaa is Moody's highest credit rating. All three major credit rating agencies (the other two being Fitch and Standard & Poor's) have downgraded the United States below their top credit rating.
Why did Moody's decide to make this call? It is due to "the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns." It is not only what has led the United States to this precipice, but also what is to come. To quote Moody's once more:
We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The U.S.' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.
Pro-Trump economist Stephen Moore questioned the timing of the downgrading. Trump thought it was a political hit job, even though he conveniently neglected to mention that Fitch Ratings downgraded the U.S. government's credit rating during the Biden administration. And while the Biden administration made some fiscally poor decisions (e.g., Inflation Reduction Act, American Rescue Plan Act), this is not the world trying to stick it to Trump, no matter how much Trump would like to think otherwise.
For those who have been paying attention the United States' fiscal outlook, this downgrade does not come as a shock. This downgrade is quite frankly overdue given how the U.S. government has spent money as if it grew on trees. I have covered this topic about long-term government debt since 2013 and have covered it since (see here, here, here, and here). When a government consistently spends more money than it has and spikes its debt-to-GDP ratio in such a fashion, this is an example of "you reap what you sow." And as Moody's was correct to illustrate, Trump's income tax reduction extension from the Tax Cuts and Jobs Act (TCJA) is only going to exacerbate that ratio. If you need more information on how rising debt will have negative impacts on economic growth, jobs, investment, and income, you can read this report from the Peter G. Peterson Foundation that was released last week.
The significance of Moody's downgrading is not simply about the exorbitant spending. As I brought up during the COVID pandemic when I wrote about how we should still be concerned about growing federal debt, there is a certain debt-to-GDP ratio that focuses more government expenditures on interest payments and less on other programming. Moody's is correct to point out that the United States has reached that level. As the Peter G. Peterson Foundation pointed out last January, interest payments have gotten to the point of surpassing what the United States pays in defense spending. This likely means that the days of the United States borrowing tons of money without dealing with inflation or higher interest rates is over, which will have ripple effects not only in the U.S. economy, but also the global economy. In the meantime, lagging economic growth and a debt spiral will ensue if Congress does not act.
What Moody's has to say should not be taken lightly. All major credit rating agencies are sounding the same alarm. The U.S. fiscal situation is unsustainable and what Congress is looking to do is only going to make matters worse. The American Action Forum accurately identifies Social Security, Medicare, and Medicaid as the major culprits since those programs account for the majority of non-interest federal spending. Not addressing that entitlement spending is also why DOGE's attempts to deal with government has been paltry thus far. There is not even an independent fiscal committee to deal with the matter. Whether the political will exists remains to be seen (I doubt it does), it is clear that not even Moody's is hopeful in the short-term. I will say that if Congress does not work to make important decisions now, the United States will go through some truly hard times as this century progresses.
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