UBS: US fiscal stimulus may fall short of expectations, high deficit poses long-term challenges.

Tax reform and budget negotiations enter a critical period. The U.S. Congress has passed their respective budget resolutions and is now advancing the "budget reconciliation" process, with key issues including continuing the 2017 tax reform, controlling deficits, and raising the debt ceiling. The House of Representatives advocates for cutting $2 trillion in spending, reducing taxes by $4.5 trillion, and increasing $300 billion in defense and border expenditures; while the Senate is more relaxed, allowing for a larger 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 discussions on various tax reduction plans (such as "no tip tax", deductions for the elderly, etc.), UBS forecasts a net GDP growth pull of only +0.1 percentage point by 2025 from fiscal policy, much lower than the market's post-election expectations of "strong stimulus". In addition, deficits are expected to remain around 6% of GDP, far above historical average levels. Worsening long-term deficits and debt risks Despite assumptions of about $2 trillion in increased revenue from tariffs, UBS predicts that the U.S. debt-to-GDP ratio will rise from 98% in fiscal year 2024 to 110% in 2027, hitting a new high since World War II. Risks of pension trust fund drying up may come earlier, possibly before 2030. Uncertainties remain in tax policy changes UBS evaluates multiple tax reform proposals, such as fully extending TCJA costing about $4.9 trillion; cancelling payroll taxes, lowering corporate tax rates, increasing SALT limits, etc., would greatly expand deficits. In addition, although OMB (Office of Management and Budget) claims to save $140 billion in expenses, its structural impact is limited and its implementation frequently faces court restrictions. Tariffs as a fiscal tool have limited effectiveness While tariffs can increase fiscal revenue, they need to be continuously collected and rely on import volumes; UBS estimates they will bring in about $2 trillion in revenue over 10 years, but may be offset by trade diversion and GDP slowdown effects. Fiscal support peaks, future growth under pressure The fiscal policy in 2023 pulls GDP growth by over 1 percentage point, by about 0.4 percentage point in 2024, and turns into slight drag by 2025. Slowdown in manufacturing investment and tightening of state government budgets will also have negative impacts on growth.