Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Investing.com – A second Trump administration is likely to see little change in the US budget deficit, despite promises of tax cuts and spending programs, according to UBS strategists.
“The already high level will force a compromise on tax cuts and spending commitments, and we think that cutting corporate taxes will not happen without a very high tax rate,” the group said. led by Jason Draho said in a letter.
The US government deficit is currently over 7.5% of GDP, while the debt to GDP ratio has risen to over 120%.
UBS notes that although the debt crisis is not imminent due to the level of US dollar reserves and deep financial markets, “the US government does not have unlimited borrowing power.”
To stabilize the debt-to-GDP ratio, policy experts believe that measures such as changes in entitlements, fiscal pressure, or higher taxes will be necessary.
The Republican-controlled Congress, despite holding the Senate, House and President, is expected to face challenges. Many small groups and hawks within the party may challenge good financial policies.
UBS pointed out that “high deficits” are now a major obstacle. For example, the additional costs of Trump’s tax and spending policies are estimated at $7 trillion over 10 years, which could rise to $15 trillion in extreme cases.
“With today’s high budget deficits and limited size, we think Congress may not hesitate to adopt measures that could increase the deficit further,” policy experts note. “In fact, some members of the administration have talked about lowering the deficit to GDP ratio to 3%.
Interest rates are another challenge, as higher interest rates have pushed the cost of servicing the government’s debt above the level of the security spending. UBS expects a modest decline in borrowing costs but recognizes risks from inflationary pressures, rate policies, and changes in the Federal Reserve’s Treasury holdings.
The bank believes Republicans can pursue fiscal policies through reconciliation, a process that allows for budget changes with a simple majority in the Senate. This could include border security initiatives and attempts to expand provisions from the 2017 tax bill.
However, extending the personal tax cuts for a full decade would cost $4 trillion, a burden that UBS believes could be reduced by limiting the extension to the short term. As UBS explains, the time limit could reduce costs to $1.3 trillion for a five-year extension.
“Shortening the tax cuts would also help Republican leaders stay below the deficit target and help support other policy commitments, such as corporate tax cuts, to raise a reduction in State and Local Taxes (SALT), and higher savings in house taxes,” policy experts explain.
Efforts to reduce financial measures are also problematic. Tax revenue, while politically attractive, is unlikely to fill the void. UBS notes that even a 10% global tariff could generate $2 trillion over 10 years, and such a move would reduce local and global economic activity.
Likewise, a reduction in spending or a more efficient profit margin could provide little relief, with UBS describing such measures as “looking for coins in bed pillows.”
As President Trump begins his second term, UBS highlights growing concerns about America’s financial health. With a government debt of more than 120% of GDP and interest costs consuming 13% of revenue—the highest among developed countries—continuation of rising deficits is seen as inevitable. steady.
UBS believes that although the immediate risks of debt problems are low, the fiscal imbalance will hinder the government’s response to economic problems in the future. Achieving long-term debt may require a combination of high growth, low interest rates, and structural changes, including fiscal pressures, policy changes, and tax increases.
