In the first installment of this note, we pointed out that one of the main problems facing the U.S. economy today is the high level of debt. one of the main problems facing the U.S. economy today is the high level of debt; And since it will continue to rise in the coming years, the fiscal stance of the candidates for the presidency in 2024 becomes relevant.

From recent years, we have that the Trump administration imposed almost US$80mm in new taxes by introducing tariffs on thousands of products between 2018 and 2019, which has meant one of the largest tax increases in decades. Recall that there are studies showing that tariffs ultimately act as taxes that affect prices upward and decrease the quantities of goods and services available, all of which - in the long run - is reflected in lower incomes, lower employment and less output.

For its part, the Biden administration has maintained most of the tariffs left in place by Trump and, in May 2024, introduced new tariff hikes on a significant number of Chinese products, including semiconductors and electric vehicles. and, in addition, in May 2024 introduced new tariff hikes on a significant number of Chinese products, including semiconductors and electric vehicles.

Some market estimates show that the tariffs introduced in the Trump-Biden period would have a long-term negative impact on the economy and imply a 0.2% reduction in GDP, a 0.1% reduction in the capital stock and the loss of about 142 thousand jobs. Some recent studies have found that the Trump-Biden era tariffs have indeed raised prices and reduced output and employment, generating a net negative impact on the U.S. economy.

Trump has proposed replacing income tax revenue with increased tariffs, which would include a 10% across-the-board tariff on all trading partners and tariffs of 60% or more on goods from China. He is also proposing further cuts to corporate taxes, which he already lowered from 35% to 21% in his reform. Finally, he hopes to extend beyond 2026 his Tax Cuts and Jobs Act (TCJA). The latter could have a fiscal cost estimated at between US$2.8 billion and US$5 billion over ten years. It is estimated that the effect of incorporating the tax and tariff measures proposed by Trump could cause a 0.8% reduction in GDP, a 0.7% reduction in the capital stock and the loss of almost 700 thousand jobs; all this, without considering that there could be an additional negative impact due to possible retaliatory tariff increases.

If Kamala Harris is confirmed as the official Democratic Party nominee, she can either continue with the same policies set forth in the budget presented for FY 2025 or she can propose additional changes. Looking at the tax changes in Biden's 2025 budget, we have three main proposals: i) additional taxes on higher incomes, ii) increased corporate tax, and iii) more tax credits for a variety of taxpayers and activities. Initial estimates indicate that these measures would have a long-term negative effect on GDP and the capital stock of 1.6% and 2.7%, respectively, as well as a loss of more than 660 thousand jobs.

As things stand, at least from a fiscal standpoint, the outlook is not very encouraging for the U.S. economy in any of the aforementioned alternatives, especially when reviewing the most recent update of the Congressional Budget Office's fiscal projections. The agency projects that - over the next ten years - spending will continue to increase at a higher rate than revenues and that the fiscal deficit will remain at around 7.0% of GDP, considerably higher than the historical average of 3.7%. With this, financing needs will obviously also increase, raising debt/GDP from the current 99% to levels above 120% by 2034. A possible consolation would be that the projected growth for the next decade would stabilize around a rate of 1.8%; although of course, this would be if the current conditions are maintained, which could change diametrically as the president-elect manages to materialize his fiscal proposals.

For all of the above and, since, like it or dislike it, the United States is still the world's leading economy, repeat after me: "God bless America"..

Milene Rodriguez
Strategy and Investment Analyst