Introduction
Fitch Ratings has expressed concerns about the fiscal outlook for the United States (EU), citing the absence of significant spending reforms. The agency anticipates that budget deficits will remain high in the coming years, with no substantial changes to fiscal policy expected during President Donald Trump’s remaining term.
Current Fiscal Landscape
Fitch projects that the fiscal deficit of public administrations will decrease to 7.1% of GDP in 2025 from nearly 8.0% in 2024, primarily due to increased tax revenue, including $160 billion in anticipated tariff income.
However, with the extension of the 2017 tax cuts and moderated GDP growth, the deficit is expected to widen to 7.6% of GDP in 2026, according to Fitch’s base scenario.
Key Spending Challenges
The rising costs of Social Security and Medicare, combined with higher interest expenses on increased debt levels, threaten to maintain high debt-servicing burdens.
Fitch expects the One Big Beautiful Bill on budget and debt limit to pass in July, but emphasizes that without significant and mandatory social entitlement reform, the US public finances will lack the resilience needed for long-term stability.
Implications of Persistent Deficits
Persistent deficits at these levels imply an increasing debt-to-GDP ratio, higher borrowing costs, and reduced fiscal flexibility to respond to future recessions or emergencies.
Investors and policymakers will closely monitor whether the administration and Congress opt for social benefit changes or revenue-raising measures, tasks that have become more urgent following Fitch’s downgrade to “AA+” in 2023 due to the recent debt ceiling impasse.
Impact of Recent Policy Changes
The tax and spending cuts approved by the House of Representatives are projected to add $2.4 trillion to US public debt over the next decade, or $3 trillion when interest costs are factored in, according to the nonpartisan Committee for a Responsible Federal Budget. This estimate was made earlier this month.
The cost could rise to $5 trillion over a decade if legislators extend temporary provisions, according to the committee.
Key Questions and Answers
- What is Fitch’s outlook for the EU’s fiscal situation? Fitch Ratings expects high budget deficits to persist in the coming years due to insufficient spending reforms.
- Why are deficits expected to remain high? There are no anticipated significant changes in fiscal policy during President Trump’s remaining term.
- What factors contribute to the high deficits? Rising costs of Social Security and Medicare, along with increased interest expenses on larger debt levels, are key contributors.
- What is the One Big Beautiful Bill? It refers to a proposed budget and debt limit legislation expected to pass in July.
- Why is social entitlement reform crucial? Without it, the US public finances will lack resilience for long-term stability.
- What are the implications of persistent deficits? They lead to an increasing debt-to-GDP ratio, higher borrowing costs, and reduced fiscal flexibility.
- How will recent policy changes impact the debt? The tax and spending cuts approved by the House of Representatives are projected to add $2.4 trillion to US public debt over the next decade, or $3 trillion with interest costs.
