U.S. fiscal outlook remains challenging amid high deficits, Fitch says

Fitch Ratings projects continued U.S. fiscal challenges, forecasting deficits to remain elevated at 7.1% of GDP in 2025 and rising to 7.6% in 2026 due to factors including the extension of 2017 tax cuts and weaker growth; the debt-to-GDP ratio is projected to reach 135% by 2029. While some spending cuts are anticipated, Fitch emphasizes that significant entitlement reform is crucial for long-term fiscal sustainability, noting that large deficits and debt burdens constrain the U.S.'s 'AA+'/Stable sovereign rating and that little change in fiscal policymaking has occurred since its August 2023 downgrade.

Analysis

Fitch Ratings highlights persistent challenges for the U.S. fiscal outlook, forecasting general government fiscal deficits to remain elevated, narrowing to 7.1% of GDP in 2025 from nearly 8% in 2024, before widening again to 7.6% of GDP in 2026. The temporary improvement in 2025 is attributed to higher revenue collection, including a projected $160 billion from tariffs, but this is offset by the extension of the 2017 TCJA tax cuts and anticipated weaker economic growth contributing to the 2026 deterioration. Fitch's Debt Dynamics Model projects the U.S. debt-to-GDP ratio will reach 120% next year and escalate to 135% by 2029. While planned spending cuts, such as tighter eligibility for Medicaid and food stamps, and an estimated $150 billion in annual savings from the Department of Government Efficiency (DOGE), offer some fiscal relief, Fitch underscores that these are insufficient without significant reforms. The agency stresses that meaningful mandatory entitlement reform is critical for medium-term public finance sustainability, particularly as rising Social Security and Medicare costs are projected by the Congressional Budget Office to add 2 percentage points to deficits over the next decade. These large fiscal deficits, high debt levels, and increasing interest burdens continue to constrain the U.S.’s ’AA+’/Stable sovereign rating, with Fitch observing minimal change in fiscal policymaking since its August 2023 downgrade from ’AAA’. The impending passage of the "One Big Beautiful Bill" in July to raise the federal debt limit is Fitch's base case, yet Treasury Secretary Scott Bessent has warned of a reasonable probability that the government's cash and extraordinary measures could be exhausted in August, coinciding with Congress's recess, introducing a period of potential fiscal uncertainty.

Key Decisions for Investors

• Investors should closely monitor upcoming U.S. fiscal policy developments, particularly discussions around entitlement reform and the debt limit, given the projected rise in the debt-to-GDP ratio to 135% by 2029 and its potential impact on sovereign credit quality.
• Consider the implications of sustained high deficits and rising debt levels on long-term U.S. interest rates and the U.S. dollar, potentially adjusting portfolio allocations to mitigate these risks.
• Be prepared for potential market volatility around August due to fiscal uncertainties, including the debt limit timeline and the exhaustion of Treasury's cash reserves, as flagged by the Treasury Secretary.