As speculation swirls around the possibility of a second term for former President Donald Trump, analysts are scrutinizing the potential implications for U.S. fiscal policy. A recent report by UBS strategists highlights a crucial finding: the fiscal deficit is unlikely to improve significantly despite Trump’s campaign pledges towards tax cuts and expansive spending initiatives. The current fiscal deficit is alarming, surpassing 7.5% of the nation’s GDP, while the debt-to-GDP ratio has surpassed 120%. It poses significant concerns about America’s financial stability and future economic health.
The UBS team, led by Jason Draho, indicates that immediate fiscal challenges will limit aggressive financial policies. The high deficit will inevitably necessitate compromises on proposed tax cuts and spending measures. In their analysis, UBS emphasizes that corporate tax cuts may only be feasible if there is a significant increase in tariff revenue. However, this poses an intricate challenge, as increasing tariffs could act as a double-edged sword — while aiming to alleviate fiscal pressures, elevated tariffs may stifle both domestic and global economic growth.
The political landscape complicates matters further. Even with a Republican-controlled Congress, achieving substantial revisions to fiscal policy may prove difficult. Thin majorities in both the House and Senate, combined with the presence of fiscal hawks within the party, could stifle any aggressive attempts to enact policies that would increase the deficit. Even though some administration officials have expressed long-term aims of lowering the deficit-to-GDP ratio to 3%, this ambition seems far-fetched given the current fiscal realities.
One key takeaway from the UBS report is the potential for a staggering $7 trillion increase in the deficit over the next decade if proposed tax and spending policies are fully implemented. A more expansive agenda could see this figure balloon to an estimated $15 trillion. Such figures are not only staggering; they serve as a clear indication that fiscal prudence will be overshadowed by political aspirations.
In a further layer of complexity, interest rates present another significant obstacle for fiscal policy. With rising interest rates resulting in debt servicing costs outpacing even defense spending, the government’s fiscal options become even more constrained. UBS anticipates a slight easing in borrowing costs, yet they are quick to caution against inflationary pressures and potential shifts in monetary policy. As the Federal Reserve continues to adjust its Treasury holdings, any volatility could further exacerbate the fiscal challenges faced by the government.
Considering the Republican agenda, it seems likely that fiscal policies will be pursued through the process of reconciliation. This streamlined approach allows budgetary changes with a simple majority, potentially facilitating border security funding and extensions of some provisions from former tax legislation. However, the prospect of extending personal income tax cuts over a decade, estimated to cost around $4 trillion, appears unsustainable unless paired with shorter extensions, which could mitigate costs significantly. Limiting the extension to five years, for instance, could reduce the burden to approximately $1.3 trillion.
In examining the mechanisms for offsetting these fiscal pressures, the prospect of tariff revenue emerges as a politically attractive but overstated solution. UBS’s careful analysis reveals that even implementing a 10% universal tariff would yield only $2 trillion over a decade — far less than what fiscal initiatives require. Moreover, such tariffs would likely negatively influence economic activity both domestically and globally, potentially leading to a net loss rather than gain.
The search for spending cuts or operational efficiencies, akin to “looking for coins in the couch cushions,” yields minimal relief. Without substantial reforms, such fiscal strategies are unlikely to provide the necessary support for substantive changes in fiscal policy.
As Trump’s second term looms, increasing unease about the health of America’s fiscal status is palpable. With debt exceeding 120% of GDP and interest payments swallowing 13% of government revenues — the highest ratio among developed nations — the trajectory of rising deficits is likely unsustainable. While immediate risks of a fiscal crisis remain low, the long-term implications of persistent fiscal imbalances could severely restrict the government’s ability to navigate future economic storms.
Ultimately, achieving long-term debt sustainability will necessitate a combination of factors: faster economic growth, stabilized interest rates, and comprehensive structural reforms—including modifications to entitlement programs and tax increases. The path ahead is fraught with political challenges and fiscal realities that will require careful navigation as we contemplate the complex financial landscape of potential future governance under a second Trump administration.