Moody's upgrades outlook for U.S. government debt

(FILES) This picture taken on January 17, 2012 in Paris shows a close-up of the opening page of the ratings agency Moody's website. Moody's affirms France's top Aaa rating on May 24, 2012. AFP PHOTO / JOEL SAGET (Photo credit should read JOEL SAGET/AFP/GettyImages) JOEL SAGET

WASHINGTON Moody's Investors Service upgraded the outlook for U.S. government debt to "stable" from "negative" and affirmed the United States' blue-chip Aaa rating.

The ratings agency cited a surprising drop in the federal deficit -- the difference between what the government collects in taxes and what it spends. The U.S. government is on track to report its lowest annual deficit in five years.

Through the first eight months of the budget year, the deficit has totaled $509.8 billion, according to the Treasury Departure. That's nearly $400 billion lower than the same period last year.

The Congressional Budget Office forecasts the annual deficit will be $670 billion when the budget year ends on Sept. 30. That would be well below last year's deficit of $1.09 trillion and the lowest since President Barack Obama took office. It would still be the fifth-largest deficit in U.S. history.

The deficit hit a peak 10.1 percent of gross domestic product -- the broadest measure of the U.S. economy -- in the depths of the Great Recession in 2009. The CBO expects the deficit to fall to 3.4 percent of GDP in 2014 and 2.1 percent in 2015.

Moody's had lowered the outlook to "negative" two years ago. But it never went as far as rival Standard & Poor's, which stripped the U.S. of its top credit rating in 2011.

S&P last month upgraded its outlook for long-term U.S. government debt but kept its rating at AA+, a notch below its top grade.

An improving economy and tax hikes and spending cuts that took effect this year have narrowed the government's budget gap.

Still, Moody's warned that the government needed to control longer-term deficits as Baby Boomers age and begin to collect Social Security and Medicare. Failure to do so "could put the rating under pressure again."

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