Investing.com – As President-elect Donald Trump prepares to embark on his second term, UBS analysts expect constraints shaping the incoming administration's fiscal policies.
Despite Republican control of both chambers of Congress, UBS notes that high deficit dynamics, narrow congressional margins, and rising debt servicing costs are likely to limit expansionary fiscal initiatives.
UBS expects the fiscal deficit to remain high, constrained by a range of economic and political factors.
The federal deficit currently exceeds 7.5% of GDP, and the ratio of government debt to GDP has exceeded 120%, which raises 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 unlimited.
Although Trump has offered ambitious tax cuts and spending promises, UBS expects the small Republican majority in Congress to pose challenges.
The report indicates that fiscal hawks within the Republican Party could hinder expansionary tax and spending plans, especially in light of the significant costs involved.
Extending the personal income tax cuts under the Tax Cuts and Jobs Act of 2017 alone would cost an estimated $4 trillion over ten years. UBS notes that such measures may be limited to shorter horizons or require compensation such as increased tariffs.
Trump's campaign promises include significant increases in spending on border security and an extension of tax cuts.
UBS analysts expect these proposals to face resistance from fiscal conservatives and Democrats.
In addition, high interest rates further complicate the financial landscape. Net interest payments on US debt have already exceeded defense spending, representing a major shift in budget priorities.
UBS stresses that although the US debt crisis does not appear imminent, the long-term trajectory is worrying.
Current projections indicate that the debt-to-GDP ratio in the United States will rise to 132% by 2034 under current trends, and the deficit is expected to remain above 7% of GDP over the next decade.
Efforts to stabilize the debt-to-GDP ratio will likely require difficult choices, including entitlement reform and potential tax increases. However, political resistance to these measures remains strong.
UBS analysts suggest 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 time frame. Instead of a ten-year renewal, a five-year extension could ease financial pressures by reducing the expected revenue loss.
This more measured approach may help balance other fiscal priorities without significantly increasing the deficit.
Another avenue being explored is using tariffs to generate additional revenue. Particular focus was on tariffs targeting China, given bipartisan support for a tougher trade stance.
While tariffs could provide a financial boost, UBS warns that this approach carries significant economic risks, including potential retaliation and reduced global trade activity, which could ultimately strain the US economy.
Finally, the concept of financial repression is highlighted as a means of managing debt costs relative to GDP growth.
By maintaining artificially low interest rates and implementing regulatory measures to ensure institutional purchases of government bonds, the administration can contain debt service expenses.
UBS notes that such strategies can provide relief in the near term, but also underscore the complexities of managing long-term financial sustainability in an environment characterized by high levels of debt.
