United States faces potential downgrade in major international ranking: 'Weak fiscal outlook'

A key rating agency has sounded the alarm on the United States' fiscal outlook, with the recent government shutdown increasing concerns that political divisions within the world's biggest economy will continue to spill over into financial matters. 

Scope, a Europe-based rating agency, has scored the U.S. as "AA" but with a "negative outlook" that threatens further downgrading, according to a report by Reuters. 

"The administration's increasingly unconventional policy approach has placed pressure on the long-standing checks and balances of the U.S. governance system and are seen as credit negative for the U.S. sovereign rating," said Eiko Sievert, an analyst for Scope, according to Reuters, noting the current "weak fiscal outlook."

What's happening?

The U.S. federal government shutdown commenced Oct. 1 at midnight after a budget deal could not be reached. Experts fear that this instability and lack of predictability could impact the United States' economic outlook. 

In May, Moody's became the last of the so-called "Big Three" credit rating agencies to downgrade the U.S. from the coveted AAA rating, noting that the United States carried an overall debt load and interest costs "that are significantly higher than similarly rated sovereigns," Al Jazeera reported at the time. Rating agency Fitch downgraded the U.S. in 2023, while Standard & Poor's made the move back in 2011. 

"Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's explained at the time, according to Al Jazeera. "Over more than a decade, U.S. federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues." 

In the months since, concerns over the United States' ability to meet its more than $36 trillion debt burden have only increased. The nonpartisan Congressional Budget Office has projected that the One Big Beautiful Bill Act, which became law in July, will add $3.4 trillion to the deficit over the next decade.

Despite cutting $1.1 trillion in expenses — largely from social safety net programs like healthcare and food stamps, as well as renewable energy incentives — the law will add to the federal deficit, according to the CBO. This is the result of $4.5 trillion in projected lost revenue, largely due to tax reductions for the wealthiest Americans and corporations.

The latest government shutdown has only increased investors' anxieties over the ability of the U.S. to continue to make payments on its ballooning federal deficit. 

Why is the United States' credit rating important?

Downgrades to the U.S. credit rating hurt the country, its economy, and its residents in many ways. Just as with an individual's credit score, when a country's sovereign rating goes down, it can be more difficult and more expensive to borrow money. When a country is viewed as a riskier investment, lenders will demand a higher return in the form of elevated interest rates. This means that the amount of money that the U.S. pays in interest — often in the form of yields on U.S. treasury bonds — will likely increase.

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This pattern can lead to a downward spiral in a country's finances, as the nation becomes increasingly unable to meet its debt obligations and a growing proportion of its finances is devoted to covering past spending and interest, which can stymie future economic growth. 

What's being done about the U.S. credit rating?

In order to regain its former status as the world's gold standard for creditworthiness, the U.S. must get its fiscal and political houses in order. 

Recent moves by the current administration have only cast further doubt, as fears over the politicization of the once highly revered Bureau of Labor Statistics and the independence of the Federal Reserve, which sets interest rates, have deepened skepticism. 

To pull itself out of its debt spiral, the U.S. needs to give experts, from BLS statisticians to Fed governors, the independence they need to do their jobs effectively. Further, voters should look to elect politicians who will seek to strike compromises that balance the needs of the American people against legitimate concerns over government spending and the federal deficit. 

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