By Davide Barbuscia
NEW YORK (Reuters) - U.S. fiscal health is expected to deteriorate further as political polarization makes it hard for any new presidential administration to negotiate steps needed to reduce the national debt burden, according to ratings agency Moody's (NYSE:MCO).
The U.S. sovereign fiscal profile is likely to weaken under either of the candidates in the Nov. 5 presidential election - Democrat Kamala Harris and Republican Donald Trump, the agency said in a report issued on Tuesday.
"The incoming administration will face a deteriorating U.S. fiscal outlook, as declining debt affordability will gradually weaken U.S. fiscal strength," the report stated. "In the absence of policy measures that can curb these trends and help limit fiscal deficits, deteriorating fiscal strength will increasingly weigh on the U.S. sovereign credit profile."
Moody's lowered the outlook on its triple-A U.S. credit rating to "negative" from "stable" in November 2023.
That came months after a rating downgrade of the sovereign credit profile by another ratings agency, Fitch, following political brinkmanship around raising the U.S. debt ceiling.
Moody's remains the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from triple-A to AA+ in August 2023, joining S&P, which has had an AA+ rating since 2011.
Moody's said it expects the U.S. government to run fiscal deficits of around 7% of gross domestic product per year over the next five years, and that deficits could rise to 9% by 2034, which would push the debt burden to 130% of GDP by then from 97% last year.
"U.S. fiscal strength will materially weaken in the absence of meaningful policy steps to reduce the fiscal deficit, rein in new borrowing to fund those deficits and slow the rise in interest expense that consumes an increasingly large share of government revenues," the agency said.
"These debt dynamics would be increasingly unsustainable and inconsistent with an Aaa rating if no policy actions are taken to course correct," it added.
Fitch said last month the U.S. fiscal profile is likely to remain largely unchanged regardless of who wins in November.
COMPOSITION OF CONGRESS
A decisive factor for the U.S. sovereign fiscal outlook will be not only the outcome of the presidential race, but also the composition of Congress as determined in the November elections, as the balance of power in the legislature could limit an incoming administration's ability to secure passage of legislation, Moody's said.
Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats.
"We anticipate that the U.S. government will remain divided, preventing sweeping fiscal reforms by the new administration. As a result, fiscal policy proposals by both candidates will likely require intense bipartisan negotiations and compromise," Moody's said.
On the other hand, a potential sweep by either party could lead to material changes in policies that may have broader effects on the economic growth outlook and the credit profile of public and private sector entities.
"Credit risks lie in the possibility of abrupt and disruptive changes to tax, trade and investment, immigration and climate policies among other areas," it said.
Trump said last month that U.S. presidents should have a say over decisions made by the Federal Reserve, indicating he could break with traditional policies toward the independence of the central bank.
Moody's said political influence over monetary policy decisions would be "credit negative" and may have repercussions on investor confidence in the U.S. financial markets.
More broadly, an "erosion of institutional strength can undermine confidence and impair the implementation of countercyclical policies, negatively affecting growth, financial markets and the operating environment for debt issuers," it said.