Moody's worried U.S. tax cuts could become permanent

NEW YORK (Reuters) - Moody's Investors Service is worried the extension of U.S. tax cuts agreed to by President Barack Obama and Republican leaders could become permanent, hurting U.S. finances and its credit ratings in the long run.

Steven Hess, Moody's lead sovereign analyst for the United States, said on Tuesday he doesn't foresee any change in the U.S. AAA ratings in the next 18 months to two years. He is, however, concerned about "what's going to happen in two years," when the extensions are set to expire again.

"The timing two years from now will be very complicated from a political point of view, with presidential elections in November 2012," Hess told Reuters in an interview.

"So we don't know if this is going to be extended again, or partially extended again," he said, adding that the tax cuts, while expected to provide an immediate "growth uptick," will hurt the country's fiscal position longer term.

"We have long-term concerns about the (U.S. credit) outlook, and they are not yet being addressed. We're waiting to see if they're going to be addressed in the next couple of years," Hess said.

The White House on Tuesday defended the proposed tax deal championed by Obama, saying the extension of all Bush-era tax cuts over two years would not worsen the medium- and longer-term U.S. deficit.

For Moody's, however, the U.S. fiscal outlook will also depend on whether the government is able to implement at least part of the budget-cutting recommendations made by the National Commission of Fiscal Responsibility.

Those recommendations, which touch sensitive areas such as Medicare, social security and defense, are unlikely to see the light of the day in the near term, "although over time some of them may be adopted," Hess said.

Moody's still see a "fairly weak" outlook for U.S. consumer spending in 2011. Before the tax-cuts extension, the ratings agency forecast the U.S. economy to expand "in the neighborhood of" 2.5 percent in 2011.

The tax measures might take growth a little higher in 2011, to between 2.5 percent and 3 percent, Hess said.

(Editing by Padraic Cassidy)