Tax Cuts will Balloon US Debt to 120% of GDP, but Boost to Economy will be ‘Short-Lived’

US is the ‘most indebted AAA-country’ and runs ‘the loosest fiscal stance,’ but the dollar as Reserve Currency still props it up: Fitch
It’s uncertain what if anything in the mix of tax cuts and tax increases being kicked around in Congress will become law. But Fitch Ratings believes that some combination will make it, and that it will sap US government revenues. ‘Under a realistic scenario of tax cuts and macro conditions,’ the US deficit would rise to 4% of GDP next year, and balloon the US debt to 120% of GDP by 2027.
And that might be the best-case scenario.
That debt-to-GDP ratio just shot up to 105% – based on annualized Q3 GDP of $19.5 trillion and the US gross national debt of $20.5 trillion that had spiked by $640 billion in eight Weeks, following the suspension of the debt ceiling in September. The debt-to-GDP ratio was 103% earlier this year.
Fitch said in the report that it expects some version of the package to pass the US Congress, and that it ‘will be revenue negative, even under generous assumptions about its growth impact.’
The tax package, which includes cutting the corporate tax rate from 35% to 20%, ‘would deliver a modest and temporary spur to growth,’ Fitch said. Even with these tax cuts, Fitch expects US economic growth to peak at 2.5% next year and then fall back to 2.2% in 2019 – the same kind of economic growth the US has seen since the Financial Crisis. So any boost to output from the tax cuts would be ‘short-lived.’

This post was published at Wolf Street on Nov 7, 2017.