US Fiscal Deficits to Remain Elevated Amid Limited Policy Changes, Rising Debt Costs: Fitch
Fitch Ratings maintains a cautious view on U.S. fiscal sustainability, projecting persistently wide federal deficits in the absence of meaningful fiscal policy adjustments through the remainder of the Trump administration. The agency’s updated baseline assumes no major deficit-reduction measures ahead of the 2026 election cycle.
Fitch projects the general government fiscal deficit will narrow to 7.1% of GDP in 2025, down from nearly 8% in 2024, largely driven by stronger revenue collection, including an estimated $160 billion in tariff receipts. Despite the improvement, the 7.1% deficit remains elevated by historical standards.
Looking ahead to 2026, Fitch’s base case forecasts the deficit widening modestly to 7.6% of GDP, reflecting the anticipated extension of the 2017 tax cuts alongside softer economic output.
While the newly created Department of Government Efficiency is expected to generate annual savings of approximately $150 billion, Fitch emphasizes that “meaningful mandatory entitlement reform will be critical for bolstering medium-term public finance sustainability,” with rising Social Security and Medicare obligations projected to fuel growing deficits over the next decade.
Elevated interest payments on the federal debt are adding further pressure to the fiscal outlook, as higher borrowing costs persist amid ongoing macroeconomic uncertainty.
Fitch noted that its working assumption is that President Trump’s “big, beautiful” budget proposal — which includes an increase in the federal debt limit — will ultimately pass in July. The agency previously downgraded the U.S. sovereign credit rating to AA+ from AAA following the debt ceiling standoff in Washington two years ago.
While outright near-term sovereign downgrade risk remains low, the U.S. fiscal profile continues to deteriorate structurally. Elevated supply risk for Treasuries, rising net interest burdens, and limited policy flexibility are increasing long-term sovereign vulnerability—warranting close monitoring, particularly for duration positioning, FX reserve managers, and sovereign allocation models.
