Investing.com – As President-elect Donald Trump prepares for his second term, UBS analysts see limitations on the next administration’s fiscal policies.
Although Republicans control both houses of Congress, UBS notes that the dynamics of high deficits, tight margins in Congress and rising debt service costs are likely to limit expansionary budget initiatives.
UBS expects the budget deficit to remain high due to a combination of economic and political factors.
The federal deficit currently exceeds 7.5% of GDP and the national debt-to-GDP ratio has exceeded 120%, raising serious questions about sustainability.
While the US benefits from its reserve currency status and deep capital markets, analysts warn that borrowing capacity is not unlimited.
Although Trump has announced ambitious tax cuts and spending promises, UBS believes narrow Republican majorities in Congress will pose a challenge.
The report suggests that fiscal hawks within the Republican Party could hamper expansionary tax and spending plans, especially given the significant costs involved.
Extending the income tax cuts from the Tax Cuts and Jobs Act of 2017 alone would cost an estimated $4 trillion over 10 years. UBS suggests that such measures could be limited to shorter periods or require compensatory measures such as higher tariffs.
Trump’s campaign promises include significant increases in border security spending and the expansion of tax cuts.
UBS analysts expect these proposals to face opposition from both financial conservatives and Democrats.
In addition, high interest rates further complicate the financial landscape. Net interest payments on U.S. debt have already exceeded defense spending, representing a significant shift in budget priorities.
UBS emphasizes that although a US debt crisis is not imminent, the long-term development is worrying.
Current forecasts suggest that under existing trends, U.S. debt-to-GDP will rise to 132% by 2034, with deficits expected to remain above 7% of GDP over the next decade.
Efforts to stabilize the debt ratio will likely require difficult decisions, including entitlement reform and possible tax increases. However, political resistance to these measures remains strong.
UBS analysts suggest several possible strategies to address the growing fiscal challenges facing the U.S. under the Trump administration.
One approach is to limit the extension of the 2017 tax cuts to a shorter period. Instead of a 10-year extension, a five-year extension could ease fiscal pressures by reducing the projected revenue loss.
This more measured approach could help balance other budget priorities without significantly expanding the deficit.
Another avenue currently being explored is the use of tariffs to generate additional revenue. A particular focus was on tariffs against China, as both parties favored tougher trade policies.
While tariffs could provide a financial boost, UBS warns that this approach poses significant economic risks, including possible retaliation and reduced global trade activity, which could ultimately weigh on the U.S. economy.
Finally, the concept of financial repression as a means of controlling the cost of debt relative to GDP growth is highlighted.
By maintaining artificially low interest rates and introducing regulatory measures to ensure institutional purchases of government bonds, the government could contain debt servicing costs.
UBS notes that such strategies could provide short-term relief, but they also highlight the complexity of managing long-term sustainability of public finances in a high debt environment.
