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Moody's: US tax overhaul to have modest impact on growth, increase deficits

Moody's said the recently passed tax bill will have a "modest" impact on U.S. economic growth and it will likely increase government deficits and add to an already rising sovereign debt burden.

The updated version of the bill is projected to result in "marginally stronger growth" as individual tax cuts boost household spending. Moody's, however, does not expect the corporate tax cuts to significantly increase business investment spending.

The tax cuts are expected to contribute 0.1% to 0.2% to aggregate economic growth on the back of forecasts that the U.S. economy will expand by 2% to 2.5% in 2018-2019.

Moody's said in a Dec. 21 report that non-financial companies that have held back spending amid a low interest rate environment may not divert the benefits from the tax cuts to investment and instead choose to pay down debt or engage in share buybacks.

The rating agency also said that higher-income households, who stand to benefit from the lowered income tax, are less inclined to spend and are more likely to save a large part of the extra cash they receive.

Moody's added that growth could be lowered if the government reduces spending to finance the tax cuts.

The deficit is expected to rise by at least $1.5 trillion over the next 10 years, excluding measures that would pay for the tax reduction.

Moody's added that the tax cuts are not expected to be self-financing.

"Higher deficits will exacerbate pressures on the federal government's finances that are already likely to arise in the coming years from the rising cost of entitlements," the report said.