UBS: U.S. fiscal stimulus may be below expectations, with high deficits becoming a long-term challenge

The tax reform and budget game has entered a critical period. The U.S. Congress has passed its respective budget resolutions and is advancing the "budget reconciliation" process, with core issues including the continuation of the 2017 tax reform, controlling the deficit, and raising the debt ceiling. The House of Representatives advocates for a $2 trillion spending cut, a $4.5 trillion tax reduction, and an increase of $300 billion in defense and border spending; the Senate is more lenient, allowing for a higher deficit expansion space (up to $6.3 trillion) and estimating based on "current policy" rather than "current law." Stimulus effects may be significantly lower than market expectations Despite the extensive discussions on tax reduction plans (such as "no tax tips," senior deductions, etc.), UBS expects that the net impact of fiscal policy on GDP growth in 2025 will only be +0.1 percentage points, far below the market's expectations for "strong stimulus" after the elections. Additionally, the deficit is expected to remain around 6% of GDP, well above historical averages. Long-term deficit and debt risks are escalating Although it is assumed that tariffs will bring in about $2 trillion in revenue, UBS expects that the U.S. debt-to-GDP ratio will rise from 98% in the fiscal year 2024 to 110% in 2027, reaching a new high since World War II. The risk of pension trust funds running dry may arrive as early as 2030. Uncertainty remains regarding tax policy changes UBS evaluates multiple tax reform proposals, such as fully extending the TCJA, which would cost about $4.9 trillion; if Social Security taxes are eliminated, corporate tax rates are lowered, and SALT limits are raised, it would significantly expand the deficit. Additionally, the DOGE (Government Efficiency Office) claims to save $140 billion in spending, but its structural impact is limited, and its implementation is often restricted by the courts. The role of tariffs as a fiscal tool is limited Tariffs can indeed enhance fiscal revenue, but they need to be continuously levied and depend on the scale of imports; UBS estimates that they will bring in about $2 trillion in revenue over 10 years, but this may be offset by trade shifts and GDP slowdown effects. Fiscal support peaks, future growth under pressure In 2023, fiscal policy is expected to contribute over 1 percentage point to GDP growth, about 0.4 percentage points in 2024, and then turn into a slight drag in 2025, with manufacturing investment slowing and state government budgets tightening also negatively impacting growth.