Investing.com – As President-elect Donald Trump prepares to begin his second term, UBS analysts foresee obstacles shaping the next administration's fiscal policies.
Despite Republican control of both chambers of Congress, UBS notes that high deficit movements, tight congressional limits, and rising debt service costs will limit expansionary initiatives.
UBS projects that the fiscal deficit will continue to increase, driven by a combination of economic and political conditions.
The federal deficit currently exceeds 7.5% of GDP, and the government debt-to-GDP ratio exceeds 120%, raising serious questions about sustainability.
While the U.S. is benefiting from its fiscal position and deep capital markets, analysts warn that borrowing power is not going away.
Although Trump has put forward the desired tax cuts and spending promises, UBS expects that the small Republican majority in Congress will pose challenges.
The report shows that financial hawks within the Republican Party can block big tax and spending plans, especially given the significant costs involved.
Extending the personal income tax cuts in the 2017 Tax Cuts and Jobs Act alone would cost about $4 trillion over ten years. UBS suggests that such measures may be limited to short horizons or require mitigation such as tax increases.
Trump's campaign promises include a significant increase in border security spending and an extension of tax cuts.
UBS analysts predict the proposals will face opposition from both conservatives and Democrats.
In addition, high interest rates make the financial situation more difficult. The remaining interest payments on the US debt have already exceeded defense spending, marking a significant shift in budget priorities.
UBS emphasizes that while the US debt crisis does not appear imminent, the long-term trajectory is troubling.
Current projections show that US debt-to-GDP will rise to 132% by 2034 under current trends, with deficits expected to remain above 7% of GDP for the next ten years.
Efforts to stabilize the debt-to-GDP ratio will require difficult choices, including entitlement reforms and possible tax increases. However, political opposition to these measures remains strong.
UBS analysts suggest several possible ways to deal with the growing financial challenges the US faces under the Trump administration.
Another option involves reducing the 2017 tax cut extension in the short term. Instead of a ten-year renewal, a five-year extension could reduce financial stress by reducing projected revenue losses.
This more balanced approach can help balance other fiscal priorities without increasing the deficit.
Another method being explored is the use of taxes to generate additional revenue. Some focus has been on tariffs targeting China, given bipartisan support for a tough trade deal.
While the payments may provide a boost, UBS warns that this approach carries significant economic risks, including potential retaliation and a slowdown in global trade, which could ultimately depress the US economy.
Finally, the concept of financial stress is emphasized as a way to control the cost of debt in relation to GDP growth.
By keeping interest rates unnecessarily low and implementing regulatory measures to ensure institutional purchases of government bonds, the administration can contain debt servicing costs.
Those plans, UBS notes, may provide short-term relief, but they also highlight the difficulty of finding long-term financial stability in the face of high debt levels.