It’s the turn of the United States government to face a sovereign rating being downgraded by the Moody’s from its top AAA rating — Moodys keeps downgrading the ratings of many developing countries including India. Moody’s Ratings cut the United States’ sovereign credit rating down a notch to Aa1 from the Aaa, the highest possible. however As1 would mean the economy is stable but not strong.
Moody’s cited the burgeoning debt burden of the US government in financing the federal government’s budget deficit and rising cost of rolling over existing debt amid high interest rates. A sign that it has inherited the burden from the previous Biden government and nothing in 100 days to bring down the debt or the cost of servicing the debt.
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the ratings agency said in a statement.
The decision to lower the United States credit profile could be expected, at the margin, to lift the yield that investors demand in order to buy U.S. Treasury debt to reflect more risk, and could dampen sentiment toward owning U.S. assets, including stocks. Having said that, all the major credit rating agencies continue to give the United States their second-highest available rating.
The yield on the benchmark 10-year Treasury notes climbed 3 basis points in after-hours trading, trading at 4.48%. The iShares 20+ Year Treasury Bond ETF fell about 1% in extended trading, while the SPDR S&P 500 ETF Trust fell 0.4%.
Moody’s had been a holdout in keeping U.S. sovereign debt at the highest credit rating possible and brought the 116-year-old agency into line with its rivals. Standard & Poor’s downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023.
The vote in the Budget Committee was 16-21, with a band of conservative hard-liners who are pushing for steeper spending cuts joining all Democrats in voting against the multi trillion-dollar legislation, leaving its fate uncertain.
“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s analysts said in a statement. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Massive deficit
The U.S. is running a massive budget deficit as interest costs for Treasury debt continue to rise due to a combination of higher rates and more principal debt to finance. The fiscal deficit in the year that began October 1 is already running at $1.05 trillion, 13% higher than a year ago. Revenue from tariffs helped shave some of the imbalance last month.
The Moody’s downgrade came as the GOP-led House Budget Committee rejected a sweeping tax cut package as part of President Donald Trump’s agenda, including extending tax cuts enacted in 2017.
Moody’s officially rated U.S. bonds in 1993 for the first time but had assigned a “country ceiling rating” of AAA on the U.S. since 1949.
As if Moody’s stripping the US economy of its triple ratings, wasn’t’ a shock for the Trump administration, GOP Conservatives blocked Trump’s agenda bill from advancing in a major setback. It’s a shock for the GOP seniors.
The House Budget Committee – HBC – voted down the massive party-line package, with a critical band of Republicans pushing for deeper spending cuts.
The GOP-led HBC voted to reject a sweeping package for President Donald Trump’s agenda, dealing an embarrassing setback to Speaker Mike Johnson, R-La., and Republican leaders.
The vote in the Budget Committee was 16-21, with a band of conservative hard-liners who are pushing for steeper spending cuts joining all Democrats in voting against the multi trillion-dollar legislation, leaving its fate uncertain.
The Republicans who voted “NO” were Reps. Chip Roy of Texas, Ralph Norman of South Carolina,Andrew Clyde of Georgia and Josh Brecheen of Oklahoma. Rep. Lloyd Smucker of Pennsylvania changed his vote from “yes” to “no,” he said, as a procedural move to allow Republicans to call the bill up again.
During the hearing, Roy fired a warning shot at Republican leaders, saying he opposes the bill as written because it will increase the deficit.
“I have to now admonish my colleagues on this side of the aisle. This bill falls profoundly short. It does not do what we say it does with respect to deficits,” Roy said. “That’s the truth. Deficits will go up in the first half of the 10-year budget window and we all know it’s true. And we shouldn’t do that. We shouldn’t say that we’re doing something we’re not doing.”
“This bill has back-loaded savings and has front-loaded spending,” Roy added. “I am a no on this bill unless serious reforms are made today, tomorrow, Sunday. Something needs to change or you’re not going to get my support.”
After the vote tally was read, Rep. Jodey Arrington, R-Texas, the committee chair, adjourned the hearing and told members they would not be meeting again this weekend.
“It’s like the last day of third grade. We get to go home,” Rep. Glenn Grothman, R-Wis., quipped after the hearing. But he predicted the bill would eventually pass. “It has to pass,” Grothman said.
Negotiations with the GOP holdouts will continue in the coming days. The House Budget Committee announced it would reconvene to take up the bill again on Sunday at 10 p.m. ET.
“You never know until you ask the question where people stand, which is the reason I called for a vote. You can’t accomplish anything in life without having deadlines and decisions,” Arrington told reporters afterward. “Today was a deadline and a decision, and it’s one of the decision points to get us to the successful passage of the reconciliation bill.”
Friday’s delay means that it will now be more difficult for Johnson to meet his self-imposed Memorial Day deadline to pass what Trump has called his “big, beautiful bill” and send it to the Senate.
But Smucker told reporters he hopes the legislation can pass committee by Monday, which would keep the House on track to approve the measure by the end of next week. “So, we’re working through some remaining issues here. There are just a few outstanding issues. I think everyone will get to yes,” Smucker said.
In a post on X, the Freedom Caucus said its members will work through the weekend to reach a deal to pass the package.
“Reps. Roy, Norman, Brecheen, Clyde and others continue to work in good faith to enact the President’s ‘Big Beautiful Bill’ — we were making progress before the vote in the Budget Committee and will continue negotiations to further improve the reconciliation package,” the post from the Freedom Caucus’ account said. “We are not going anywhere, and we will continue to work through the weekend.”
The failed vote came just hours after Trump took to Truth Social to admonish GOP “grandstanders” and urge Republicans to get behind the bill.
“Republicans MUST UNITE behind, ‘THE ONE, BIG BEAUTIFUL BILL!’” Trump wrote. “We don’t need ‘GRANDSTANDERS’ in the Republican Party. STOP TALKING, AND GET IT DONE!” he said.
Republican leaders conceded that changes would be needed for the bill to pass through the House, where the party holds a slim majority. In addition to the spending and deficit concerns from the right, a group of blue-state Republicans have called for a higher cap on the state and local tax deduction, or SALT. The house strength is now 220 to 215. With GOP hardlines crossing the aisles it’s going to be a tough task for speaker Johnson to get the budget passed.
Across the aisle, Rep. Brendan Boyle, D-Pa., previewed the Republican divisions at the outset of the hearing, vowing that all Democrats would oppose it. “You will hear over the course of this hearing a vigorous debate. And frankly there is a strong divide between Republicans and some other Republicans. There is also a divide between both sets of Republicans and this side of the dais,” said Boyle, the top Democrat on the budget panel. “I can speak at least as to why every Democratic member will be voting no on the bill for billionaires.”
What are the factors that drive the US economy and the government’s debt burden. Is the US economy driving towards desired objectives? The answer is NO, it appears to be in the same stagnation period that Biden left it in and Trump instead of reducing the debt is only increasing it.
And that is because he is not increasing the revenues which can offset the high cost of servicing the debts through increased revenues. Instead Trump wants to resort to tax cuts to increase his popularity base particularly the billionaires who contributed funds to his historic victory in the 2024 elections.
Here’s how it pans out.
US’s Current Fiscal Path
Debt is projected to continue to rise because there is a structural mismatch between spending and revenues.
The national debt is nearly as large as the entire U.S. economy and is projected to exceed its record high relative to the size of the economy in just 4 years, according to the Congressional Budget Office (CBO).
Why is US debt rising so dramatically?
There is a fundamental imbalance between spending and revenues that will continue to grow in future years. CBO anticipates that federal spending will rise from 23.3 percent of GDP in 2025 to 26.6 percent in 2055, according to the agency’s March 2025 long-term projections. Revenues also are projected to increase during that period, but more slowly — from 17.1 percent of GDP in 2025 to 19.3 percent in 2055 — which means deficits will continue to rise in the decades ahead.
Key Drivers of the National Debt
What is causing the growth of US national debt?
There are three primary drivers of the overall growth in spending: America’s aging population, rising healthcare costs, and rapidly escalating interest costs. Significant growth in those categories is combined with a tax system that is not designed to collect enough revenues to fund the promises that have been made.
1) Aging Population
Over the next 25 years, the major driver of rising long-term federal spending is the aging of America’s population, as the number of people 65 or older will increase much faster than the working-age population, leading to increases in spending on programs for retirees.
The first wave of the baby-boom generation has already reached retirement age. Americans are living longer, on average, which means that seniors will spend more years in retirement. In the coming decades, those factors will add substantially to the number of people supported by programs targeted to older Americans, such as Social Security and Medicare.
2) Rising Healthcare Costs
The rising cost of healthcare in the United States is a key driver of the national debt. CBO’s projections anticipate that the federal government’s spending on major healthcare programs, such as Medicare and Medicaid, will climb from 5.8 percent of GDP in 2025 to 8.1 percent in 2055. Additionally, the Centers for Medicare & Medicaid Services note that total healthcare spending from all sources will grow to reach one-fifth of the entire economy.
On a per capita basis, the U.S. healthcare system is the most expensive among other wealthy countries. Yet, America’s health outcomes are generally no better than those of our peers, and in some cases, are worse, including in areas like life expectancy, infant mortality, asthma, and diabetes.
3) Rising Interest Costs
One of the most damaging effects of rising debt is the rapidly growing interest costs.
As the national debt grows and interest rates rise, the United States will spend more of its budget on the cost of servicing that debt — crowding out opportunities to invest in the economy.
Interest costs are the fastest-growing “program” of the federal budget and will total $13.8 trillion in the next 10 years alone, according to CBO.
4) Insufficient Revenues
It would be one thing if the tax code were designed to fund all the promises made, but it is not. The U.S. tax system does not generate nearly enough revenues to cover federal spending.
Furthermore, our tax code is also overly complex, confusing, inefficient, and unfair. For example, it remains riddled with tax expenditures, or “tax breaks,” that provide financial benefits to specific activities, entities, and groups of people. Those tax breaks, which totalled nearly $1.9 trillion in 2024, increase annual deficits and can create market distortions that damage economic growth and productivity.
Economic Impact
A strong fiscal foundation is essential for a growing, thriving economy.
Putting the US nation on a sustainable fiscal path creates a positive environment for growth, opportunity, and prosperity. With a strong fiscal foundation, the nation will have increased access to capital, more resources for future public and private investments, improved consumer and business confidence, and a stronger safety net.
However, if policymakers fail to act, the opposite is also true. If the country’s long-term fiscal challenges remain unaddressed, the economic environment will weaken as confidence suffers, access to capital is reduced, interest costs crowd out key investments in our future, the conditions for growth deteriorate, and the US nation is put at greater risk of economic crisis. If the long-term fiscal imbalance is not addressed, its future economy will be diminished, with fewer economic opportunities for individuals and families and less fiscal flexibility to respond to crises.
source ; multiple publications and congress budget office.
Contributor, IANS - Washington DC/New York
Executive Editor, Corporate Tycoons - Pune, India
Executive Editor, The Flag Post - Bengaluru, India
Contributor, The Statesman, Hindu Business Line, Sarkaritel.com, Diplomacyindia.com
Former Economics Editor, PTI - New Delhi, India
Former Communications Advisor,
Alstom Group of Companies, SA - France/Belgium
