Rising inequality will likely weigh on U.S. credit rating: Moody's

NEW YORK (Reuters) - Widening income inequality will likely hit the U.S. government’s top-notch credit rating as it struggles to contain political and social divisions at a time when deficits are on the rise, ratings firm Moody’s said on Monday.

Moody’s however maintained its “AAA stable” rating on U.S. debt. Only one of the three big ratings agencies, Standard & Poor’s, has downgraded the U.S. to “AA+” over a 2011 debt ceiling showdown and “political brinkmanship” in Washington.

Rising inequality “is a key social consideration that will impact the U.S.’ credit profile through multiple rating factors, including economic, institutional and fiscal strength,” Moody’s said in a report. It would also likely boost government spending to support lower-income households, “which is unlikely to be offset by revenue raising measures following recent tax cuts.”

“Overall, rising inequality will make it more politically difficult to mitigate the US’ adverse fiscal dynamics over the medium term,” Moody’s added.

In the wake of the financial crisis, record U.S. equity prices coupled with sluggish wage gains in an otherwise hot economy has widened already stark income inequality in the United States. Compared to global peers, wealth is also more concentrated in the world’s largest economy.

The trend “coincides with a deteriorating fiscal outlook amid rising ageing-related entitlement spending,” Moody’s said.

Reporting by Jonathan Spicer; Editing by Chizu Nomiyama