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Announcement:

Moody's: US budget proposals show no path for tackling longer-term fiscal challenges

Global Credit Research - 26 May 2017

London, 26 May 2017 -- The US administration's 2018 budget proposals give no indication of how it plans to address the country's longer-term fiscal vulnerabilities, Moody's Investors Service said in a report today. If the budget were to be implemented in its current form - which Moody's does not expect - the US fiscal position would not improve; it would worsen more quickly than the rating agency currently expects.

The report, "Government of the United States of America - White House Budget Proposal Offers No Sign Of How Longer-Term Fiscal Vulnerabilities Will Be Addressed", is available on www.moodys.com. Moody's subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The future direction of the US credit profile will rest mainly on the evolution of its fiscal strength, which will in turn be largely determined by trends in federal deficits and debt, particularly over the medium-term as the cost of entitlements rises," said Sarah Carlson, a Moody's Senior Vice President and the report's co-author. "Overall, the budget proposal's significance lies mainly in the absence of any indication of how those longer-term fiscal vulnerabilities will be addressed."

While the budget is formally the responsibility of Congress, the White House's 23 May budget document signals the administration's policy priorities. It is not known which, if any, of the proposals Congress will ultimately agree to.

However, Moody's expects that some unfunded tax cuts will ultimately be implemented, which is likely to bring forward the weakening in US fiscal strength and the country's credit profile that the rating agency expected to start from the end of this decade.

The administration's budget proposal relies on a number of economic assumptions that differ materially from the projections of the Congressional Budget Office (CBO) and Moody's own forecasts. Most notably, the administration projects that real GDP growth will rise to a new steady-state of 3.0% by 2020. Moody's forecasts GDP growth to average 2.1% over 2017-2021 and estimates that the US's long-term growth potential is around 2%.

Another source of downside risk to the projected narrowing of the deficit relates to the assumptions about the outcome of the tax reform, as well as its impact on economic activity and tax revenue.

More than a third of the projected federal deficit reduction over the fiscal years 2018-2027 is derived from the "effect of economic feedback" through higher revenues. With the tax reform proposal still taking shape, its net impact on growth remains highly uncertain. Even if positive, however, it is likely to make only a minimal contribution to growth rates in the long run.

Expenditure cuts proposed by the White House would be politically challenging to pass into law. Furthermore, the budget proposal relies largely on non-military discretionary spending cuts as well as cuts to Medicaid, non-retirement Social Security benefits, and other poverty-alleviation programs. This approach is unlikely to yield the deficit-reduction goals that the administration outlines in its proposal.

The budget document also provides little detail on the composition of tax cuts flagged by the administration. The budget's 10-year forecasts for major streams of tax revenue are at odds with both the historical record and the kind of policies that the administration has advocated.

Subscribers can access the report at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1074231

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Sarah Carlson
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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