U.S. government finances are already under stress, and both presidential candidates are promising policies that will likely intensify those strains, eventually denting the country’s economic strength and its growth prospects, says Morningstar DBRS in a new report.
The rating agency noted that the U.S. fiscal outlook is already “worrying,” with the federal debt-to-GDP ratio on track to reach its highest level since the Second World War, and to continue climbing, in the years ahead.
“Without an adjustment, the deficit trajectory and debt servicing costs are projected to quickly deteriorate at the end of the decade,” it said.
“Yet as the U.S. election enters the final stretch, former President Donald Trump and Vice-President Kamala Harris have made it clear that fiscal rectitude is not a campaign priority,” the report noted. In fact, both candidates have made election promises that “would almost certainly make the country’s fiscal challenges worse,” it said.
While their respective proposals have shifted over time and often lack detail, DBRS projects that Trump’s proposed agenda of cutting corporate and other taxes and raising tariffs “could add about 1.0% to 1.5% of GDP to the baseline deficit trajectory each year.”
The fiscal proposals from Harris would likely also add to the deficit, although not as much as the Trump proposals, it said.
She also promised to cut taxes for most individuals while pledging to replace the lost revenue by hiking taxes for businesses and the wealthy, including increasing the capital gains tax rate.
Overall, her plans would likely “add 0.25% of GDP or more to the federal deficit annually,” the report said.
While both candidates have promised policies that would worsen the fiscal situation, DBRS noted that the composition of Congress will also play a big part in deciding how much of the candidates’ agendas are ultimately adopted.
“Polls suggest that the presidential and congressional elections will be decided by very small margins. With this backdrop, we think there is a good chance of divided government,” it said, which means many of the candidates’ fiscal proposals would likely be watered down or dropped.
While there are several areas where bipartisan cooperation seems likely, DBRS said these are items that would likely boost deficits too — such as expanding child tax credits and cutting taxes on service workers’ tips.
“With both candidates promising tax cuts and neither willing to address rising Social Security and health-care entitlement spending, prospects for fiscal consolidation during the next administration appear low,” DBRS said.
Ultimately, these deteriorating government finances will likely spill over to the economy, it warned.
“If policymakers are unwilling to address the government’s sizable and growing fiscal imbalance, public debt metrics will continue deteriorating over the medium term, and will eventually end up weakening the country’s growth prospects and resilience to shocks,” it said.