Fitch: Tax reform progress supports US macro, fiscal forecasts

In its latest note, the US-based Fitch ratings said that “the passage of a tax reform bill by the US Senate last weekend puts an end to any lingering uncertainty about the achievability of tax reform and points to a joint tax cut bill passing Congress before the end of the year.”

Key Points:

“As tax reform was already factored into our macroeconomic forecasts, Fitch projections remain unchanged as a result of the Senate bill's passage. Tax cuts in line with the House and Senate bills will lead to larger federal deficits and debt in the long term with only temporary positive growth effects. 

The Congressional Joint Committee on Taxation's (JCT) dynamic score of the Senate bill indicated that the revenue loss from an earlier version of the bill would be around USD1trn over 10 years. This was less than a static score of USD1.4trn - close to the maximum allowed by the joint budget resolution passed in October - but still within the range assumed by Fitch.

Fitch forecasts the general government debt ratio to rise by 20 percentage points to 120% by 2027, higher than before tax reform. Overall, the passage of tax cuts adds to an already relatively loose fiscal policy stance compared with other advanced countries. 

It also remains to be seen whether tax cuts prove durable. The Senate bill passed on strict party lines with no Democrats voting in favor. Should the Democrats make sufficient gains in congressional mid-term elections in November 2018, or in a future presidential election, they may attempt to reverse elements of the reform.”