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Investing.com – As President-elect Donald Trump prepares to begin his second term, UBS analysts foresee challenges that will shape the next administration’s fiscal policies.
Despite Republican control of both houses of Congress, UBS recognizes that the power of higher deficits, lower budget deficits, and rising debt servicing costs could limit many financial systems.
UBS projects that the deficit will remain high, under pressure from a combination of economic and political factors.
The federal deficit currently exceeds 7.5% of GDP, and the federal debt to GDP has exceeded 120%, which raises serious questions about sustainability.
Although the US benefits from its level of savings and deep financial markets, analysts warn that borrowing power is not limited.
Although Trump has given big tax promises and spending promises, UBS expects that the minority of Republicans in Congress will cause problems.
The report shows that the hawks in the Republican Party can block many tax and spending plans, especially considering the huge costs involved.
Extending the individual tax cuts from the 2017 Tax Cuts and Jobs Act would cost $4 trillion over ten years. UBS suggests that such measures may be limited to shorter periods or require reductions such as additional fees.
Trump’s campaign promises include a major increase in border security spending and an extension of tax cuts.
UBS analysts predict that these proposals will face opposition from fiscal conservatives and Democrats.
In addition, high interest rates tighten financial conditions. Interest rates on the US debt have already surpassed defense spending, marking a major shift in budget priorities.
UBS emphasizes that although the US debt crisis does not seem imminent, the long-term trend is worrying.
The latest projections suggest that US debt-to-GDP will rise to 132% by 2034 under current policies, with deficits expected to remain above 7% of GDP over the next decade. coming.
Efforts to stabilize the debt-to-GDP ratio may require tough choices, including entitlement reform and possible tax increases. However, political opposition to these measures remains strong.
UBS analysts suggest several strategies to address the growing financial crisis the US is facing under the Trump administration.
Another approach involves limiting the extension of the 2017 tax credits to the short term. Instead of a ten-year renewal, a five-year extension could ease the financial burden by reducing the expected loss of revenue.
This more balanced approach could help balance other fiscal priorities without widening the deficit too much.
Another option being explored is the use of fees to generate additional revenue. There is a strong focus on tariffs aimed at China, given bilateral support for the difficult trade situation.
While the tariffs may provide a financial boost, UBS warns that the approach carries significant economic risks, including potential retaliation and a slowdown in global business activity, which could eventually destabilize the American economy.
Finally, the concept of fiscal pressure is highlighted as a way to control the cost of debt related to GDP growth.
By maintaining artificially low interest rates and implementing regulatory measures to ensure that corporations buy government bonds, the system can contain debt servicing costs.
Such measures, UBS notes, can provide temporary relief, but also highlight the difficulties of dealing with long-term financial performance in an environment of high levels of debt.
