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Macro Charts

Moody's: Left unchecked, entitlement spending will drive long-term decline in US fiscal strength

Over the next decade, US federal government debt could reach 100% of GDP, as an aging population and rising healthcare costs drive a material increase in mandatory spending on Social Security and Medicare. Unless the government takes steps to stem the increase in entitlement spending or raise revenues to offset them, weakening government finances will erode the US's fiscal strength and exert negative pressure on the sovereign credit profile.

» Rising entitlement spending will be a major driver of long-term US federal government expenditure growth. We expect annual federal government spending to rise to about 24% of GDP in 2029 from a long-term average of about 20%.1 Mandatory entitlement programs are by far the largest expenditure item in the federal budget. Absent major policy changes, we expect government spending on these programs to increase to 12.5% of GDP in 2029 from 10.2% in 2019.

» Social Security and Medicare will drive entitlement trends given an aging population and rising healthcare costs. At 23% of total annual expenditures, Social Security is the US's largest entitlement program, and its outlays are set to rise to about 6% of GDP by 2030 from 4.9% in 2019. Although Medicare outlays are smaller, at around 15% of annual budget expenditures and 3.0% of GDP, they will be the fastest growing, and will ultimately converge with Social Security over the long run. As in other advanced economies, rising US entitlement costs will be driven by an aging population and expected increases in life expectancy. Demographic trends will also likely weigh on government revenues through lower potential growth as the US's working-age population declines.

» Resulting deterioration in US fiscal position will pressure sovereign credit profile through declining fiscal strength. Higher entitlement spending, combined with relatively weak revenue generation, will contribute to widening fiscal deficits, a rising debt burden, deteriorating debt affordability and diminishing fiscal strength. On the basis of current policy settings, we estimate that federal debt will reach 100% of GDP by 2029 from about 79% in 2019.

» Proposed entitlement program reforms could meaningfully improve the US fiscal outlook. However, Congress has demonstrated little appetite to address mandatory entitlement reform in recent years, and the magnitude of the adjustment required will continue to grow as the entitlement burden increases over the coming decade.

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