Tariffs Offer Short-Term Gain but Long-Term Pain for US Economy

Fitch Ratings report indicates that while tariff revenues may help reduce the US budget deficit by 2025, economic growth will suffer, limiting fiscal benefits. Increasing tariffs could lead to a potential recession, affecting Federal Reserve policy and tax proposals by President Trump, all amidst growing concerns about long-term spending.

A recent report by Fitch Ratings suggests that although tariff revenues are poised to aid in narrowing the US budget deficit by 2025, the broader economic implications could stymie any durable fiscal benefits. Economic growth is expected to face challenges, largely due to additional tax cuts and the ongoing hindrance of unaddressed long-term spending pressures.

According to the report, tariffs announced on April 2 would elevate the US Effective Tariff Rate (ETR) to approximately 25%, a sharp increase from the 18% predicted in Fitch's March 2025 Global Economic Outlook. The implications of these tariffs remain uncertain, particularly concerning product-specific exemptions in sectors like pharmaceuticals and semiconductors.

The increase in ETR, surging from 2.4% last year, could generate significant revenue—estimated at USD800 billion—under stable import volumes, the report indicates. However, Fitch warns that this uptick could heighten recession risks, complicating the Federal Reserve's ability to adjust interest rates amidst potential price shocks.

A more pronounced economic downturn would burden non-tariff revenues and amplify spending through automatic stabilizers. While tariff income may lead to additional tax cuts, including President Trump's proposed corporate tax reductions, large-scale expenditure reductions remain uncertain. Current data suggest a growing federal deficit, pegged at USD1.15 trillion for early FY25.

(With inputs from agencies.)