The ratings agency Moody’s joined many other debt watchdogs recently in expressing alarm at the rapidly deteriorating fiscal situation of the US government. Moody’s still rates US debt as AAA, the highest level, but in 2023 it lowered its outlook from stable to negative. Two other rating agencies, Standard & Poor’s (S&P) and Fitch, have already cut the US rating one notch, from AAA to AA+.
The latest Moody’s analysis suggests that it, too, may lower the US rating at some point in 2025. Moody’s cites the unchecked rise of federal debt as a percentage of GDP, along with ballooning interest costs due to higher borrowing rates. That gloomy debt trajectory will likely worsen as Congress passes a set of tax cuts and tax-cut extensions later this year, one of Trump’s top economic priorities.
“The US’s fiscal strength is on course for a continued multiyear decline, driven by widening federal budget deficits, a rising debt burden and falling debt affordability,” Moody’s analysts wrote in a March 25 report. “Debt affordability remains materially weaker than for other AAA-rated and highly rated sovereigns.”
Trump says his plans to impose widespread tariffs on imports and slash the federal bureaucracy will boost domestic manufacturing, shift growth from the public to the private sector, and benefit the overall economy. Like many other forecasting groups, Moody’s isn’t buying it. “Evolving US policies, particularly on trade and tariffs, may be more significant headwinds to growth, which raises short-term risks to our forecasts,” the firm said.
There’s a vast gap between what serious budget analysts foresee and what Trump and his advisers claim. America's publicly held federal debt is now about 100% of GDP, compared with a median of just 44% for nations with AAA-credit ratings, according to Moody’s. The Congressional Budget Office expects debt to continue rising as a share of GDP, hitting 119% in 10 years and 136% in 20 years.
Those forecasts do not include any of the tax cuts the Republicans who control Congress are likely to pass by the end of the year. Those tax cuts would likely add $4 trillion to $10 trillion to the national debt during the next decade, pushing debt even higher as a percentage of GDP.
Team Trump has a rosier view of the nation's fiscal future. Tesla CEO Elon Musk, who heads the “DOGE” government efficiency commission, said recently that he expects DOGE to achieve $1 trillion in federal spending cuts by May. If so, that would be a significant 15% cut in federal spending, which would improve the budget picture.
But Musk’s budget math resides in a kind of alternate universe where there’s no auditing, accountability, or even timeframe. Musk hasn’t explained how many months or years his supposed savings cover. In many instances, DOGE has claimed phony savings from double- or triple-counting, canceling contracts that are already expired or mistakenly entering too many zeroes in a spreadsheet. And DOGE efforts to gut the IRS could actually push the national debt higher, not lower, by curtailing the government's ability to police tax cheats and collect taxes legally owed.
Moody’s expects any DOGE cuts to be “small relative to mandatory spending and unlikely to result in significant savings over the near term.” Plus, none of those cuts will be real unless Congress cuts spending through legislation, which could happen at the margins this year but probably won’t come close to $1 trillion.
President Donald Trump talks to reporters as he walks on the South Lawn of the White House, in Washington, Sunday, March 30, 2025. (AP Photo/Jose Luis Magana) ·ASSOCIATED PRESS
Goldman Sachs, for instance, recently cut its forecast for GDP growth this year, while raising its inflation estimate, all because Trump’s tariffs are turning out to be more aggressive than expected. Lower growth almost always dings federal revenue, while higher inflation implies higher interest rates and therefore higher borrowing costs for Uncle Sam and anybody else who issues debt.
S&P cut the US credit rating from AAA to AA+ all the way back in 2011, citing political dysfunction after a standoff over raising the federal borrowing limit. S&P hasn’t changed its rating since then, and it hasn’t made any statement about US government debt since Trump won last year’s presidential election. Fitch cut the US credit rating from AAA to AA+ in 2023, citing “the expected fiscal deterioration over the next three years.” It hasn’t changed its outlook since then.
The 2011 S&P downgrade was a bombshell since it was the first time in modern history that America’s perceived creditworthiness fell below that of any other nation. Lower creditworthiness normally means the creditor has to pay a higher interest rate to borrow. But rates on US Treasurys did not end up going higher. The dollar has remained the world’s preferred currency, and US Treasurys are still considered a safe-haven asset, which keeps US interest rates low relative to the rest of the world.
Even that, however, may not be enough to forestall a US fiscal crisis at some point. Interest payments on the national debt are gobbling up an increasing portion of taxpayer dollars, rising from $577 billion in 2019 to $1.1 trillion in 2024. The United States now spends more on interest payments than on all but two other spending categories, Social Security and Medicare.
As a percentage of GDP, US interest payments are four times higher than the median for top-rated governments, and only going higher, according to Moody’s. The United States is already a privileged borrower that can manage a higher debt load than just about any other country. But it's pushing its luck — and the next era looks dingier, not shinier.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
