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Investing.com -- From pandemic stimulus checks to the bank bailouts of 2008, fiscal measures have long shielded Americans from economic calamity. But UBS warns the curtain is falling on this era of government-driven economic support, as policymakers pivot away from the great fiscal experiment that defined recent decades.
"In our view, a great experiment in fiscal stimulus is coming to an end," UBS analysts wrote in a note Friday.
With Congress embarking on budget reconciliation to cut taxes and spending over the next decade, markets are focused on whether the deep tax cuts expected at the start of 2025 will materialize. While the Senate passed a budget resolution seeking $1.5 trillion in tax cuts relative to the current policy in place, the House passed a budget resolution seeking $4.5 trillion in tax cuts when spending cuts are considered.
The final outcome on tax cuts is likely to be modestly stimulative, the analysts said, pointing to many spending cuts that aren't truly cuts.
The analysts expect net tax reductions and spending cuts at the federal level. The House budget resolution, however, instructs spending bill writers to find $2 trillion in spending cuts, add $300 billion of spending on border enforcement and defense, and instruct the Committee on Ways and Means to cut taxes by $4.5 trillion. This could potentially rein in spending on key sectors including agriculture, education, and energy, which face potential cuts of $230 billion, $330 billion, and $880 billion, respectively.
While the revenue collected from the tariff rollouts is expected to help boost America's balance sheet, UBS projects persistently wide deficits will push debt-to-GDP sharply higher in the coming years -- reaching approximately 110% by 2027—levels not seen since World War II -- that will narrow the path for massive fiscal expansion.
"We expect the narrative shift away from optimistic fiscal stimulus to expecting something more modest to be the right reset of expectations," the UBS analysts concluded.