U.S. House Bill Would Widen Fiscal Deficit

  • In a tightly contested vote, the U.S. House of Representatives has approved President Donald Trump’s ambitious tax and spending plan, dubbed the ‘big beautiful’ bill, by a thin margin of 215 to 214 votes. With the legislation now moving to the Senate for a decisive final vote, analysts at Fitch Solutions anticipate its passage in the coming weeks, potentially with minimal adjustments.
  • The budget incorporates a combination of tax cuts for social security payments, tips and overtime; spending cuts to key areas such as agriculture, education, government oversight, among others; and spending increases in areas such as defence and homeland security.
  • According to estimates by the Congressional Budget Office (CBO), the bill would add US$2.3Tn in additional deficits over the next decade, compared to its baseline projections, which would keep the deficit near 7.0% of GDP. However, this is potentially an underestimate given that the Committee For A Responsible Federal Budget estimates that it could add closer to US$2.5Tn. Fitch’s previous long-term forecast anticipated a gradual reduction of the fiscal deficit to 6.1% of GDP over the next decade.
  • Bond investors have shown some concern about the prospect of widening deficits and increasing government debt, especially given the likelihood of subdued economic growth in the short term. This anxiety is reflected in the rising yields of 10-year and 30-year bonds, which have increased by 50 basis points (bps) and 100 bps, respectively, since early April, largely due to an increase in the term premium. This suggests that investors are demanding higher compensation to hold longer-term debt.
  • In addition, the rise in U.S. yields is also pushing up global bond yields, with many markets seeing a rise in longer-dated yields, particularly Japan. However, part of the recent increase in bond yields can be attributed to slightly improved expectations for the U.S. and global growth. This optimism follows the recent easing of tariff rates, which has led to a decreased probability of a recession in the U.S.

(Source: Fitch Connect)