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Fitch Ratings: GOP tax plan will hike deficits, be ‘revenue negative’

by Niv Elis - 11/07/17 3:17 PM ET

The GOP tax plan will increase deficits and only have a short-term effect on growth, according to an analysis by credit ratings agency Fitch.

“Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate,” the analysis said.

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Fitch said it expected U.S. gross domestic product growth to peak in 2018 before dropping down to 2.2 percent in 2019. The Trump administration has claimed its reforms would lead to sustained economic growth of 3 percent a year. Treasury Secretary Steven Mnuchin has also claimed that economic growth would cover the deficits, and could even bring them down.

The ratings agency also said that the additional deficits brought on by the tax bill would leave the U.S. exposed when the next economic downturn hit. Policymakers often try to stimulate the economy with tax cuts and deficit spending when recessions hit. An already-deep deficit leaves them with fewer options, and could put the country’s credit rating and borrowing costs at risk when a downturn hits.

“The U.S. is the most indebted ‘AAA’ country and it is running the loosest fiscal stance. Long-term debt dynamics are also more negative than those of peers, with health and social security spending commitments set to rise over the next decade,” the report said, calling the impact “revenue negative.”

The agency was maintaining its ratings outlook for the U.S., however, because of the advantages conferred by controlling the reserve currency and having financing flexibility not available to other countries.

Tags Fiscal policy Fitch Ratings GOP tax plan Steven Mnuchin