U.S. Loses Top Credit Rating Amid Deficit Surge

U.S. Loses Top Credit Rating Amid Deficit Surge \ Newslooks \ Washington DC \ Mary Sidiqi \ Evening Edition \ Moody’s Ratings downgraded the U.S. government’s credit score from Aaa to Aa1, citing unsustainable debt and political dysfunction. The agency warned federal deficits could reach 9% of GDP by 2035. It’s the third major agency to issue a downgrade following S&P in 2011 and Fitch in 2023.

Quick Looks

• Moody’s lowers U.S. credit rating from Aaa to Aa1.
• Cites growing deficits, rising debt, and political inaction.
• Warns federal deficit could hit 9% of GDP by 2035.
• U.S. retains “exceptional credit strengths” like dollar dominance.
• Downgrade follows similar actions by S&P (2011) and Fitch (2023).
• Entitlement spending, interest payments, and tax cuts drive debt.
• Moody’s flags $4 trillion cost of extending 2017 tax cuts.
• Political gridlock blamed as key factor in downgrade.
• GOP blocks tax increases; Democrats resist spending cuts.
• House Republicans fail to advance tax and cut package.
• Internal GOP disputes over Medicaid and green tax breaks.
• All Democrats joined hard-right Republicans to block proposal.

Deep Look

In a move that underscores growing concern over the United States’ long-term fiscal outlook, Moody’s Ratings on Friday stripped the U.S. government of its coveted Aaa credit rating, downgrading it one notch to Aa1. The decision marks the final step in a series of downgrades by major credit agencies, following similar actions by Standard & Poor’s in 2011 and Fitch Ratings in 2023.

While Moody’s acknowledged that the U.S. still possesses “exceptional credit strengths”—including the size, resilience, and dynamism of its economy and the global reserve status of the U.S. dollar—it cited the continued failure of successive governments to rein in ballooning deficits and national debt as a major risk to the country’s long-term fiscal health.

Moody’s analysts warned in a statement that the federal budget deficit, currently at 6.4% of GDP, is expected to rise to nearly 9% by 2035. The widening gap is being driven primarily by three escalating pressures: rising interest payments, increased entitlement spending, and low revenue generation relative to the size of government expenditures.

The report also specifically pointed to the political stalemate in Washington, labeling the nation’s political dysfunction as a critical obstacle in addressing long-term fiscal challenges. The agency expressed concern that a persistently gridlocked government—with Republicans staunchly opposed to tax hikes and Democrats resistant to spending cuts—has failed to produce meaningful, long-term deficit-reduction strategies.

Among the major policy concerns cited was the extension of former President Donald Trump’s 2017 tax cuts, a priority for the Republican-controlled House. According to Moody’s, renewing those tax reductions would add an additional $4 trillion to the federal primary deficit over the next decade. These figures do not even account for interest payments on the resulting increase in debt, which would further strain federal budgets.

The timing of Moody’s downgrade is politically significant. It came on the same day that House Republicans failed to advance a major fiscal package that included a mix of tax breaks and spending reductions. The legislation was derailed not by Democrats alone, but by a fracture within the Republican ranks, as hard-right lawmakers demanded even deeper cuts to Medicaid and a full rollback of President Biden’s green energy tax incentives. Their refusal to compromise aligned them with Democrats, leading to the proposal’s defeat in the Budget Committee.

The internal division within the GOP illustrates the political complexity of addressing America’s long-term debt. While both parties have publicly acknowledged the severity of the issue, they remain deeply divided on solutions. The Republican focus remains on trimming welfare and entitlement spending, while Democrats favor a mix of modest spending adjustments and higher taxes on corporations and the wealthy.

This inaction has real financial consequences. A downgrade in sovereign creditworthiness can increase borrowing costs, affect investor confidence, and ultimately weaken the government’s ability to respond to economic downturns or emergencies. While the U.S. still holds the top rating from many investors due to its unique economic role globally, the warning signs are clear: unchecked debt and political infighting are beginning to affect the country’s long-standing image of fiscal stability.

Moody’s decision also reflects concerns over rising interest rates, which have made debt servicing significantly more expensive. As the Federal Reserve maintains higher rates to fight inflation, the cost of existing debt—already in the tens of trillions—continues to grow rapidly.

Some economists caution that the U.S. is on an unsustainable fiscal path. While the economy remains strong in absolute terms, the structural imbalances between revenue and spending are growing harder to ignore. Programs like Social Security, Medicare, and Medicaid consume an ever-larger portion of the federal budget, and with the baby boomer generation aging, those costs are expected to surge.

Political analysts say the downgrade should serve as a wake-up call to lawmakers, but whether it leads to concrete action remains uncertain. Past credit downgrades have had limited immediate impact on borrowing rates due to the U.S. dollar’s position as the world’s default currency. However, repeated warnings could eventually take their toll if not addressed.

In response to the news, Treasury officials reiterated that the U.S. continues to enjoy strong demand for its debt, and emphasized that its economic fundamentals remain sound. Yet Moody’s message is clear: confidence in those fundamentals is not infinite, and continued fiscal inaction could lead to further downgrades or long-term consequences.

With elections looming and partisan divisions deepening, few expect a comprehensive debt reform package anytime soon. But with each downgrade, the pressure on Congress to act grows more acute.

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