Moody’s sounds alarm over GOP civil war, political polarization

Credit ratings agency Moody’s changed its outlook on the U.S. to negative from stable on Friday, citing concerns over fiscal risks and increased political divisions that it said could “constrain” policymakers from taking actions needed to get the world’s largest economy on the right path with budgetary policy.

Moody’s is the only ratings agency that has yet to downgrade the U.S. In August, Fitch lowered the country’s rating to a notch below its top level, following the deadlock in Washington over raising the debt ceiling, suggesting that such disagreements undermined confidence in fiscal policymaking.

Since then, the U.S. came close to a government shutdown in September. After a last-minute passage of a continuing budget resolution, the Republican-controlled House of Representatives ousted its speaker for the first time in the country’s history. The GOP then spent weeks trying and failing to elect a new leader until finally choosing a little-known congressman, Mike Johnson of Louisiana, to fill the vacancy.

With the next government funding deadline approaching on November 17, Johnson has struggled to corral his party to pass the spending bills needed to finance government operations beyond next Friday.

Newsweek reached out for comment from Johnson’s office via email.

“At a time of weakening fiscal strength, there is an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability,” Moody’s said on Friday.

It cited the debt limit drama, former Speaker Kevin McCarthy‘s ouster, the paralysis in choosing his replacement and a looming government shutdown as examples of disagreements that could undermine policymaking.

“These risks underscore rising political risk to the US’ fiscal position and overall sovereign credit profile,” the ratings agency said. “In Moody’s view, such political polarization is likely to continue.”

U.S. current debt of $33 trillion is increasingly becoming less affordable amid elevated interest rates, Moody’s said. Without reforms, fiscal deficits—meaning government spending is higher than its revenues—will hit 8 percent of economic activity in about a decade, fueled by high interest payments on the debt and spending on entitlements. This is more than double the 3.5 percent the average deficit was between 2015 and 2019, Moody’s said.

What that means is the country’s debt will balloon to 120 percent of gross domestic product, from 96 percent last year. “In turn, a higher debt burden will inflate the interest bill,” Moody’s said.

Washington policymakers have struggled to grapple with this challenge, compared with other highly rated countries, like Canada and Germany. As a result, the top-notch credit rating the U.S. enjoys has been put in jeopardy.

“The more short-term focus of U.S. fiscal policymaking, along with limited fiscal flexibility…exacerbates already fractious bipartisan politics around a relatively disjointed and disruptive budget process,” the ratings agency said. “As annual debt service costs continue to rise, fiscal flexibility will diminish even further.”

The central place the U.S. has in the global economy, its currency and its “formidable credit strengths” have protected it from a downgrade, Moody’s said, and allowed it to retain its triple-A rating.

Deputy Treasury Secretary Wally Adeyemo said in a statement that President Joe Biden‘s administration disagreed with Moody’s shift in outlook. “The American economy remains strong,” he said, according to Reuters.

The government has managed to get $1 trillion in deficit reduction, Adeyemo added, arguing that the White House’s budget proposals would cut the deficit by nearly $2.5 trillion over the next 10 years.

One Republican lawmaker placed the blame for Moody’s action on Biden’s policies.

Texas Senator John Cornyn posted on X (formerly Twitter): “Bidenomics: United States credit-rating outlook was changed to negative from stable by Moody’s Investors Service, which said the downside risks to the country’s fiscal strength have increased.”