Moody’s changed the outlook on the U.S. credit rating from negative to stable this week, citing improving deficits. While this is good news, policymakers should curb their enthusiasm about what this means for the U.S. debt situation.

The improvement could be fleeting, as Moody’s relies heavily on favorable economic growth projections and assumes only moderate increases to interest on the federal debt. The ratings agency also warned that further deficit reduction is needed to address rising spending on government health care programs and Social Security over the longer term.

The short-term improvement in the U.S. deficit comes on the heels of a growth-slowing major tax increase affecting nearly all Americans and signed into law by President Obama in December. Moreover, an improving housing market has increased the dividends the Treasury is collecting from mortgage giants Fannie Mae and Freddie Mac.

On the spending side, Part 2 of the Budget Control Act’s spending reductions—sequestration—reduced spending in the discretionary budget for 2013. And contrary to President Obama and others who predicted economic damage, the U.S. economy largely shrugged off these cuts.

According to Moody’s, the U.S. economy "has demonstrated a degree of resilience to major reductions in the growth of government spending.”

But sequestration reduces projected spending over the next decade by only about 2.5 percent. Major reductions in the growth of government spending still need to be enacted.

-Romina Boccia - Heritage.org