The credit rating agency Moody’s in a report released Thursday enumerated the challenges facing the state’s budget, including faltering tax revenue, increasing costs for Medicaid and education, and the capping of state and local tax deductions by Congress.

The state faces a budget shortfall of as much as $4.4 billion. If spending is capped at 2 percent, as it has been for the last eight years, the gap shrinks to $1.7 billion.

“The gap occurs primarily because school aid and Medicaid, the two largest portions of the budget (27% and 20%, respectively) grow faster than revenues, which have grown more slowly than the budget office projected,” the Moody’s report states. “Personal income tax collections have been disappointing, particularly estimated taxes that stem mostly from capital gains. Sales and business tax collections have also fallen short of expectations. Although the state has been experiencing steady economic growth, the unemployment rate has ticked up to 4.7%, compared to 4.1% nationally, and personal income growth has also lagged the nation in recent years.”

Meanwhile, the capping of state spending at 2 percent increases is going to be an increasing challenge, according to Moody’s.

“The Cuomo administration’s budget strategy has been to offset growth in school aid and Medicaid costs by reducing costs and suppressing growth elsewhere in the operating funds budget, holding state operating funds spending growth to 2% annually,” the report found.

“However, this strategy becomes more challenging to sustain over a long period of time because it involves increasingly difficult choices in areas that are subject to repeated cuts. It has also been assisted by nonrecurring actions such as shifting certain costs across fiscal years or onto off-budget accounts and by use of portions of proceeds from monetary settlements with financial and other institutions to support operating expenses.”

Spending for health care will also be tested as the federal government potentially trims costs, making it difficult to backfill those costs for New York, one of the largest recipients of the federal aid.

“Given the state’s large safety net hospital network, this raises the possibility that lawmakers will seek to fill the breach,” Moody’s found.