Fitch: Tax Cuts May Heighten Budget Deficit Pressures in the U.S.
Fitch Ratings stated that the Republican victory in the U.S. elections indicates that the discussions in Congress regarding the federal debt ceiling in January are likely to be resolved without significant contention.
"The tax cuts approved in 2017 are also likely to be extended for renewal next year. Beyond these extensions, additional new tax reduction measures will increase the already large federal deficit unless balanced by spending cuts and tariff revenues," Fitch noted. The agency pointed out that Trump's victory and the likelihood of Republicans taking control of both chambers of Congress significantly increase the potential for the enactment of Trump's core campaign policy promises.
Fitch reminded that among Trump's campaign promises were the imposition of tariffs on imports from China at rates as high as 60%, increased immigration restrictions, and the extension of tax cuts included in the Tax Cuts and Jobs Act (TCJA), which will be renewed in 2025.
"Bare-bones scenario financial forecasts already included the extension of most TCJA tax cuts. Since we downgraded the U.S. credit rating to 'AA+'/Stable in 2023, while growth has shown better performance, the fiscal position has weakened. Our expectation that the overall government debt-to-GDP ratio will rise from this year's level of 115% to 122% by 2026 is approximately 1.5 points higher than the key assumptions during the rating downgrade.
We expect the overall government deficit to remain largely unchanged at an estimated 7.6% of GDP in 2024 and during 2025-2026. Our analysis has shown that the overall fiscal outcome would be similar regardless of the election result. However, Trump's other tax-related promises pose additional risks for our deficit forecasts in 2025 and 2026. Trump has also called for a reduction of the corporate tax rate from the current 21% to 15% (with revenues in fiscal year 2024 equivalent to 1.8% of GDP). Moreover, he has vowed to exempt certain types of income from taxes, including overtime pay, tips, and social security benefits," it stated.