Moody's, the international credit rating agency, has downgraded the United States' national credit rating from the highest level by one notch, leading to interpretations that this action serves as a political warning directed at the U.S. Congress, particularly the Republican Party, beyond economic judgment.
Heather Long, a columnist for The Washington Post (WP), noted on the 19th (local time) that "the timing of Moody's downgrade is closer to a political message than simply economic data," adding that it implicitly carries a request to Republicans in Congress to "not advance the tax cut bill." Moody's has revealed concerns that the additional large-scale tax cut proposals from the Republican Party could impose a greater burden on the U.S. economy given the already serious fiscal situation.
The proposed tax cut by the Republican Party is estimated to generate an additional $3.3 trillion in liabilities over the next 10 years. This is nearly double the size of the "Tax Cuts and Jobs Act" passed during the Trump administration in 2017. Moody's stated that if this bill is extended, the federal budget deficit, excluding interest expenses, could reach $4 trillion.
The more serious issue is the soaring interest expenses. Moody's warned that the proportion of interest payments, which accounted for only 9% of total tax revenues in 2021, could surge to 18% by 2024, and could reach one-third by 2035. This is excessively high compared to the interest burden ratio of less than 2% for typical AAA-rated countries.
The proposed tax cut is designed in a way that heavily benefits the wealthy, and to cover this, it plans to significantly reduce social welfare budgets such as Medicaid for low-income health insurance and the Supplemental Nutrition Assistance Program (SNAP). The Congressional Budget Office (CBO) anticipates that approximately 10 million people will be excluded from Medicaid eligibility as a result. Even far-right figure Steve Bannon has expressed concern, stating, "This bill directly hits Trump's core supporters among the low-income and rural populations."
Liabilities are already rapidly accumulating. The national debt of the United States has surpassed $36 trillion, which is an increase of $16 trillion compared to the time the bill was passed in 2017. Nonetheless, the Republican Party is pushing for additional tax cuts, and signals show that confidence in U.S. government bonds is increasingly wavering on Wall Street.
The yield on 30-year U.S. government bonds recently surpassed 5%, and there are projections that mortgage rates could rise to 7%. Accordingly, the borrowing costs within the U.S. could burden both individuals and corporations.
Long pointed out that "a tax bill of this magnitude has little significance at this point and could actually lead to a recession," adding that "even the Republican Party should reconsider whether pushing this policy is strategically the right choice."