UBS Warns U.S. Fiscal Stimulus May Boost GDP by Only 0.1% by 2025

UBS has raised concerns about the potential impact of the U.S. fiscal stimulus, suggesting that the actual economic boost may fall short of market expectations. Despite extensive discussions around tax reduction plans, such as the "no-tax tip" and senior citizen deductions, UBS forecasts that the net contribution of fiscal policy to GDP growth by 2025 will be a mere +0.1 percentage point. This projection is significantly lower than the market's anticipation of a robust stimulus following the elections.

The primary reason for this conservative outlook is the anticipated high fiscal deficit, which is expected to persist as a long-term challenge. The U.S. Congress has already passed budget resolutions in both the House and Senate, and is currently engaged in the "budget reconciliation" process. Key issues under negotiation include the extension of the 2017 tax cuts and other fiscal measures aimed at stimulating economic growth. However, the effectiveness of these measures remains uncertain, given the complex political landscape and the potential for delays or modifications in the legislative process.

UBS's analysis highlights the potential for a mismatch between the anticipated economic benefits of the fiscal stimulus and the actual outcomes. The high fiscal deficit, coupled with the uncertainty surrounding the implementation of tax cuts and other fiscal measures, could limit the overall impact on GDP growth. This scenario underscores the need for a balanced approach to fiscal policy, one that addresses both short-term economic needs and long-term sustainability.

The ongoing budget negotiations in the U.S. Congress are critical in determining the final shape of the fiscal stimulus package. The "budget reconciliation" process allows for the passage of certain budget-related measures with a simple majority vote, bypassing the need for bipartisan support. However, the success of this process hinges on the ability of lawmakers to reach a consensus on key issues, such as the extension of tax cuts and the allocation of funds for infrastructure and other economic initiatives.

UBS estimates that the U.S. debt-to-GDP ratio will rise from 98% in the 2024 fiscal year to 110% by 2027, marking a new high since World War II. This increase is despite the assumption that tariffs will bring in approximately $200 billion in additional revenue. The risk of depletion of the Social Security Trust Fund is also expected to arrive earlier, potentially before 2030.

UBS has evaluated multiple tax reform proposals, including fully extending the Tax Cuts and Jobs Act (TCJA), which would cost approximately $490 billion. Other proposals, such as eliminating the payroll tax, lowering the corporate tax rate, and increasing the State and Local Tax (SALT) deduction limit, could significantly widen the deficit. Additionally, while the Government Accountability Office (GAO) claims to save $140 billion in spending, its structural impact is limited, and its implementation is often restricted by court rulings.

Tariffs, while capable of increasing fiscal revenue, require sustained collection and depend on the scale of imports. UBS estimates that tariffs could bring in approximately $200 billion over a decade, but this could be offset by trade diversion and slower GDP growth.

Fiscal support is expected to peak in 2023, contributing over 1 percentage point to GDP growth. In 2024, this contribution is estimated to be around 0.4 percentage points, and by 2025, it is expected to turn into a slight drag on growth. Factors such as slowing manufacturing investment and tightening state budgets will also exert negative pressure on economic growth.