US fiscal deficit widening after tax cuts, Fitch warns

By Ovunc Kutlu

NEW YORK (AA) – U.S. President Donald Trump administration's tax cuts and rising spending created a stimulus to boost economic growth but the federal fiscal deficit is widening, Fitch Ratings warned Wednesday.

The Tax Cuts and Jobs Act "will lead to higher deficits and debt, despite its boosting growth. Higher expenditure underscores the fiscal impact of rising mandatory spending," Fitch said in a statement.

The legislation, which was signed by Trump in December, lowers the corporate tax rate to 21 percent, from 35 percent. While this creates more liquidity for companies to boost production and make new investments, it also means lower revenue for the federal government from taxes.

Fitch said it expects the deficit for the fiscal year, ending in September, will be $849 billion, which constitutes 4.2 percent of GDP.

Data for the first 11 months of fiscal year 2018, on the other hand, show federal government revenues rising 1 percent, well below nominal GDP, Fitch said.

The rating agency said it acknowledged the U.S.'s worsening fiscal outlook resulting from fiscal loosening and rising borrowing costs when it affirmed the country's sovereign rating at 'AAA'/Stable in April.

"U.S. general government debt, at 101 percent of GDP, is already the highest of Fitch-rated 'AAA' sovereigns," the agency said, adding "evidence of greater dysfunction in fiscal policymaking could contribute to negative pressure on the rating, especially as deficits continue to widen."

Fitch also noted the mid-term elections in November could create trouble between Trump and Congress for border wall funding and other issues.