Fitch Ratings analysts think the proposed Republican tax plan will provide only a modest short-term boost to the economy — and at a high price in terms of lost revenue and added debt.
The credit rating agency said Tuesday that some version of the GOP tax bill will likely pass, pushing GDP growth to 2.5 percent in 2018. But they expect the economic boost to fade quickly, with GDP growth dropping to 2.2 percent in 2019. The analysis warns that the tax cut package won’t pay for itself, “even under generous assumptions about its growth impact” — a finding that runs counter to some GOP arguments about the long-term benefits of the plan that would allow $1.5 trillion in added deficits over a decade.
As a result, Fitch revised upward its forecast for U.S. debt: “Under a realistic scenario of tax cuts and macro conditions, the federal deficit will reach 4% of GDP by next year, and the US debt/GDP ratio would rise to 120% of GDP by 2027.”
The ratings agency says that the U.S. “is the most indebted 'AAA' country and it is running the loosest fiscal stance.” This could be particularly problematic in the event of a recession: “The US will enter the next downturn with a general government ‘structural deficit’ (subtracting the impact of the economic cycle) larger than any other 'AAA' sovereign, leaving the US more exposed to a downturn than other similarly rated sovereigns.”
Fitch also warned in a separate note on Monday that the Republican tax bill could create new fiscal constraints for some state and local jurisdictions. High-tax states such as New York, New Jersey and California could lose "tax raising flexibility," according to Fitch, as a result of the reduced deduction for state and local taxes proposed in the bill. Residents may be less willing to tolerate relatively high taxes if they cannot deduct them from their federal tax bill. Areas with high home values could also suffer due to the proposed cap on the property tax deduction, which could cause home values to grow more slowly or even drop, further constraining local government finances.