Investing.com – As President-elect Donald Trump prepares to embark on his second term, UBS analysts foresee limitations that will determine the fiscal policies of the next administration.
Despite Republican control of both houses of Congress, UBS notes that the dynamics of high deficits, narrow congressional margins, and rising debt service costs will likely limit expansionary fiscal initiatives.
UBS projects that the fiscal deficit will remain high, limited by a combination of economic and political factors.
The federal deficit currently exceeds 7.5% of GDP and the public debt-to-GDP ratio has exceeded 120%, raising serious questions about sustainability.
While the United States benefits from its reserve currency status and deep capital markets, analysts warn that borrowing capacity is not infinite.
Although Trump has unveiled ambitious tax cuts and spending promises, UBS anticipates that the slim Republican majorities in Congress will pose challenges.
The report notes that fiscal hawks within the Republican Party could obstruct expansive tax and spending plans, particularly given the significant costs involved.
Extending the personal income tax cuts from the Tax Cuts and Jobs Act of 2017 alone would cost about $4 trillion over ten years. UBS suggests such measures could be limited to shorter horizons or require offsets such as higher tariffs.
Trump’s campaign promises include significant increases in border security spending and extending tax cuts.
UBS analysts predict these proposals will face resistance from both fiscal conservatives and Democrats.
In addition, high interest rates further complicate the fiscal picture. Net interest payments on US debt have already exceeded defense spending, marking a significant shift in budget priorities.
UBS emphasizes that while a US debt crisis does not appear imminent, the long-term trajectory is worrying.
Current projections suggest that the US debt-to-GDP ratio will rise to 132% by 2034 if current trends continue, and deficits are expected to remain above 7% of GDP for the next decade.
Efforts to stabilize the debt-to-GDP ratio will likely require difficult decisions, including entitlement reform and possible tax increases. However, political resistance to these measures remains strong.
UBS analysts propose several potential strategies to address the growing fiscal challenges facing the United States under the Trump administration.
One approach involves limiting the extension of the 2017 tax cuts to a shorter period of time. Instead of a ten-year renewal, a five-year extension could mitigate fiscal pressure by reducing projected revenue loss.
This more measured approach could help balance other fiscal priorities without significantly widening the deficit.
Another avenue being explored is the use of tariffs to generate additional revenue. Particular attention has been paid to tariffs targeting China, given bipartisan support for a tougher trade stance.
While tariffs could offer a financial boost, UBS warns that this approach carries significant economic risks, including possible retaliation and a reduction in global trade activity, which could ultimately hurt the US economy.
Finally, the concept of financial repression is highlighted as a means of managing the costs of debt in relation to GDP growth.
By keeping interest rates artificially low and implementing regulatory measures to ensure institutional purchases of government bonds, the administration could contain debt service expenses.
These strategies, UBS notes, could offer short-term relief, but also highlight the complexities of navigating long-term fiscal sustainability in an environment of high debt levels.