Social Spending Jeopardises US Fiscal Profile, says Moody’s

While the US government’s current fiscal position remains relatively healthy, mandatory social spending will begin weakening the current fiscal profile of the US government at the end of the decade, according to a Moody’s Investors Service report.

The credit ratings agency (CRA) adds that for the next few years, barring another shock like the 2008 global financial crisis, the US budget deficit is expected to remain well within historical norms with Federal government debt ratios stable.

However, the fiscal implications of the US government’s healthcare-related programmes likely will put pressure on its credit profile before the end of the decade, in the absence of unexpected and sustained growth in revenue due to higher than expected gross domestic product (GDP) growth, additional tax increases, or reductions in planned expenditures.

The main drivers of the expected growth in healthcare and social security sspending are the rate of inflation in cost of healthcare services and demand for those services due to the aging of the population, Moody’s says. Broad macroeconomic trends, such as more rapid job and real wage growth could also help fund additional healthcare spending and reduce the need for tax increases or expenditure cuts.

At current rates, Moody’s projects the US federal government debt-to-GDP ratio will rise gradually to 88% by 2030, a significant increase from its roughly 75% current level. Such an increasing trend likely would bring negative pressure on the US’s credit profile.

However, the report also makes clear that a number of policy responses are available to the US authorities, and discusses the potential savings available from a selection of them.

“A number of plausible policy options are available to help stabilise debt and deficit measures,” said Moody’s senior vice president Steven Hess in the report, which is entitled
‘Social Spending Poses Risks to Fiscal Profile, Absent Policy Actions’
.

Without offering a view on which measures the US might or should take, possible fiscal adjustments that could substantially close the future funding gap include a further expansion of the social security tax base, an increase in Medicare premiums and co-payments, and modifications to health care insurance subsidies and revenues, says Moody’s.

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