Potential Impact of a Second Trump Administration on U.S. Fiscal Policy
Investing.com — Strategies from UBS suggest minimal changes to the U.S. fiscal deficit under a second Trump administration, despite significant campaign promises regarding tax cuts and spending programs.
Current Deficit Situation
The U.S. government deficit is currently above 7.5% of GDP, with the debt-to-GDP ratio exceeding 120%. UBS indicated that high deficits will necessitate compromise on fiscal policies moving forward. They believe corporate tax cuts are unlikely unless accompanied by substantially higher tariff revenues.
Constraints on Fiscal Policy
The ongoing deficit restricts the government’s fiscal maneuverability. Trump’s proposed tax and spending plans could add an estimated $7 trillion over 10 years, potentially escalating to $15 trillion under an aggressive approach. As a result, Congress is expected to be hesitant about approving any measures that would exacerbate the deficit further.
Interest Rates and Debt Management
Higher interest rates have pushed government debt service costs past defense spending levels. Although UBS anticipates a slight decline in borrowing costs, risks from inflation and various fiscal policies remain. Republicans may use budget reconciliation processes to advance fiscal proposals like border security and extending previous tax cuts, though challenges remain regarding their costs.
Revenue Issues and Sustainability
Tariff revenues, while appealing, are unlikely to bridge the fiscal gap. Even a proposed 10% universal tariff would only generate $2 trillion over ten years, potentially hindering both domestic and global economic activities.
Spending cuts will also yield limited results, likened to "looking for coins in the couch cushions." UBS raises concerns regarding America’s fiscal health exacerbated by rising government debt and high interest costs consuming a significant portion of revenue.
Long-term Outlook
While the immediate risk of a debt crisis appears low, UBS warns that persistent fiscal imbalances may limit the government's capacity to address future economic disruptions. Achieving sustainable debt levels will likely necessitate a blend of higher economic growth, lower interest rates, and structural reforms, including tax increases.
Conclusion
As Trump’s second term begins, UBS highlights that addressing the growing fiscal challenges will be essential for the U.S.'s long-term economic stability.
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