Moody's warning: the United States may have difficulty maintaining its Aaa credit rating if it does not control its fiscal deficit.

Moody's rating agency warned in a report released on Tuesday that the next US government "must work to address the growing fiscal deficit." Nearly a year ago, the agency announced that it would downgrade the outlook for the US sovereign credit rating to "negative." "Government tax and spending policies will affect the size of future budget deficits and the expected decline in US fiscal strength, which could have a significant impact on the US sovereign credit situation," analysts led by Claire Li and William Foster wrote in the report. Moody's stated that after the conclusion of the November congressional and White House elections, it is expected that "the US government will continue to be divided, preventing the new government from implementing comprehensive fiscal reforms. Therefore, the fiscal policy proposals put forward by the two candidates may require intense negotiations and compromises between the two parties." The report emphasized the importance of "fiscal strength" in rating decisions. "If meaningful policy measures are not taken to reduce the fiscal deficit, control new borrowing that funds these deficits, and slow down the increasing interest payments in government revenue, the fiscal strength of the US will be significantly weakened." The report concluded, "If policy action is not taken to correct the direction, these debt dynamics will become increasingly unsustainable and inconsistent with an Aaa rating." In November of last year, Moody's downgraded the outlook for the US sovereign credit rating from "stable" to "negative," while confirming the country's rating as Aaa, the highest investment grade. Moody's is the only one of the three major credit rating agencies to give the US the highest rating. Last August, after another debt ceiling battle in Congress, Fitch Ratings downgraded the US government's rating. Standard & Poor's Global Ratings stripped the US of its AAA sovereign credit rating during the debt ceiling crisis in 2011. The US's AAA rating is likely to depend on how the new Congress handles the Tax Cuts and Jobs Act of 2017. Moody's predicts that, given possible political resistance, the TCJA will be extended, stating that if the new Congress allows this legislation to expire, "this will lead to a significant increase in our revenue estimates and narrow our fiscal deficit forecasts." The suspension period for the US federal debt limit will expire early next year, and Moody's warns that "during a divided government, politically fraught policies surrounding the debt limit are usually more destructive." They state that given the background of "approximately $28 trillion in outstanding federal debt, massive fiscal deficits exceeding 6% of GDP, and annual federal debt net interest payments that could exceed $1 trillion (about 3% of GDP)," "addressing the debt ceiling to finance fiscal deficits and maintain financial market stability is crucial for US sovereignty." Moody's states that they "expect the US government to ultimately resolve any debt ceiling dispute and continue to repay debt in full and on time." Additionally, Moody's emphasized other key issues in the report, including: - While the independence of the Federal Reserve and its interest rate policies became an issue during the presidential campaign, Moody's stated that they "have little evidence to suggest that political factors will influence the Fed's 'independent decisions'" - US trade policy may maintain a "protectionist stance" and "push towards a shift to domestic industry policies" - "Social challenges related to immigration will continue to exist," stricter policies "may increase labor costs in industries that rely on foreign-born workers such as agriculture, healthcare, and construction" - A divided Congress "may slow down the transition to a low-carbon economy," but the rating agency stated, "the direction of the private sector, the authority of the state, and consumer preferences will continue to drive it forward"