Moody's rating agency lowered its US debt rating to negative from stable. It is still triple-A although S&P has rated the US as AA+ since 2011 and Fitch downgraded the US to AA+ in August. In its view, downside fiscal weakness has increased from continued political polarization. Deficits have continued and the interest costs now exceed $1 trillion annually, so there is less room to maneuver. With the continued debt ceiling cap, the political process will continue to have uncertainty. Eliminating the debt ceiling cap will not solve anything other than causing any debt management to be pushed further into the future without any fiscal responsibility.
Moody's expects federal interest payments relative to revenue and GDP to rise to around 26% and 4.5% by 2033, respectively, from 9.7% and 1.9% in 2022. These projections factor in Moody's expectation of higher-for-longer interest rates, with the average annual 10-year Treasury yield peaking at around 4.5% in 2024 and ultimately settling at around 4% over the medium term. The debt affordability forecasts also take into account Moody's expectations that, absent significant policy changes, the federal government will continue to run wide fiscal deficits of around 6% of GDP near term and to around 8% by 2033, the widening being driven by higher interest payments and aging-related entitlement spending. By comparison, deficits averaged around 3.5% of GDP from 2015-2019. Such deficits will raise the US federal government's debt burden to around 120% of GDP by 2033 from 96% in 2022. In turn, a higher debt burden will inflate the interest bill.
Of course, there is still the fundamental question - do deficits matter? The answer is that they do, except we don't know when or at what level. We may not know it until we hit that critical level but at that time it will be clearly too late. We do know that we are on a path that will take us to that critical level. Just because it has not mattered, does not mean it will not matter.
No comments:
Post a Comment