The outcome of the U.S. government's budget process and policy negotiations over the coming months will help determine policies that inform our view of U.S. sovereign creditworthiness. In particular, these discussions could affect our view of the U.S.'s fiscal profile--the sovereign's key credit weakness, with net general government debt that we forecast will rise toward 100% of GDP.

At this stage, though, the impact is unclear. The adoption of an unprecedented accounting approach in the budget resolution and reconciliation process reinforces the lack of clarity about the magnitude of future deficits. This legislation also incorporates an increase in the debt ceiling, which is currently binding. We expect Congress to take action to raise or suspend the debt ceiling by the needed "X-date" later this year.

Shifting Policies

Uncertainty also stems from the Trump administration's pronounced shift in trade, immigration, energy, and other foreign and domestic policies. Back and forth on much higher country-specific tariffs (besides sector-specific tariffs) heightened market volatility over the last several weeks. This culminated in a shift to the 10% baseline tariff rate on most countries for 90 days, while most Chinese goods remain under a 145% tariff.

We expect intense bilateral negotiations over the next few months amid continued market volatility.

Most policy initiatives to date have relied on over 110 executive orders. However, Congress will take a more prominent role in fiscal policy articulation. Fiscal policy outcomes that will be key for the government's fiscal trajectory cannot be accomplished with executive orders. House and Senate Republicans will formulate tax and spending initiatives--in concert with the administration.

Government Deficits And A Rising Debt Burden Are The Main Sovereign Rating Weaknesses

S&P Global Ratings focuses on policy initiatives and outcomes that affect key credit factors. Policies that improve or worsen the government's fiscal trajectory--underscoring the importance of the budget negotiations--could affect the U.S. sovereign credit rating (AA+/Stable/A-1+). The general government deficit (including state and local governments) was on the rise pre-pandemic and now, at 6%-7% of GDP this year, remains above pre-pandemic levels.

Offsetting fiscal weaknesses, various credit strengths of the U.S. sovereign include:

• The U.S.'s diversified and resilient economy, with solid growth that has pushed real per capita GDP up 30% during the last five years to above US$89,000;
• Extensive monetary policy flexibility by a credible, independent central bank, which supports global liquidity;
• Benefits associated with the sovereign's unique status as the issuer of the world's leading reserve currency; and
• Governing institutions that provide generally effective checks and balances, transparency, and decentralized decision-making.

Our institutional assessment already incorporates a higher level of political polarization compared with other similarly rated peers and the difficulties in garnering bipartisan cooperation to strengthen U.S. fiscal dynamics.

Complex Budget Process Continues

We expect to gain greater clarity on the administration and Congress' tax and spending plans in the coming months. These will be contained in a forthcoming reconciliation bill.

Fiscal actions to date include Congress passing a continuing resolution in March to avoid a government shutdown and to fund the government through September, with bipartisan support in the Senate. Congressional Republicans then shifted to formulating the broad fiscal policy framework for the Trump administration via a budget resolution. Passage of the resolution unlocks the reconciliation process, during which the tax and spending details, which remain to be negotiated, can be passed with a simple majority in both chambers.

The president and Congress also plan to increase the debt ceiling, which became binding in January, as part of the reconciliation process. This avoids relying on Democratic votes.

Irrespective of how long it takes to conclude reconciliation, we expect Congress will act in a timely manner with some form of legislation to raise or suspend the debt ceiling before the Treasury runs out of space to deploy extraordinary measures. It has done so on almost 80 occasions since the 1960s. Current estimates put the "X-date" in the June-August timeframe.

The complex budget resolution process began with the House's February version. It provided for some $4 trillion in tax cuts, essentially extending the expiring provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). It also included offsets of $2 trillion in spending cuts, including an $880 billion decrease in Medicaid spending, over a 10-year period.

However, the final resolution adopted by both chambers in April incorporated the Senate's amended version, which included changes that reinforced the uncertainty around the magnitude of the future deficit. It employed a "current policy" baseline for fiscal projections that enables a permanent extension of the TCJA. Doing so avoids having to include any offsetting spending cuts, as would be required under a typical "current law" baseline.

In addition, it provides scope for a further $1.5 trillion in tax cuts over and above the extension of TCJA. This provides additional fiscal space to include some of the president's policy priorities, such as no tax on tip, overtime, or Social Security income, and restoring 100% bonus depreciation. The resolution directs a minimum of $4 billion in spending cuts, versus the much higher $2.5 trillion initially proposed by the House. It also maintains a $500 billion increase in defense and immigration spending from its initial version.

Since the resolution passed both chambers, the process now moves to negotiating the specifics in a reconciliation bill. This entails agreement on all the tax cuts--with committees drafting specific tax legislation--and aligning on an approach to spending cuts. This could prove challenging since some House members are pushing for greater fiscal conservatism and deeper cuts--above the minimum outlined in the final budget resolution.

To secure House approval of the final resolution, leadership may need to convince the more hawkish fiscal caucus members that there would be greater top-line spending cuts specified in the reconciliation bill. How this plays out remains a question. Complicating matters is the slim Republican majority in the House, where the task is to balance the support of fiscal hawks with the fact that deeper cuts, such as to Medicaid, are unpalatable to many.

Current Picture Could Point To Rising Deficits

A clearer picture on the deficit trajectory should emerge with the reconciliation negotiations. The broad configuration, however, thus far points to a higher deficit in coming years. This is on top of the structural rise in aging-related expenditure and higher interest payments.

However, none of this legislation encompasses the potential for higher tariff revenue, the magnitude of which remains unclear. It also does not capture the effects of President Trump's federal cost-cutting efforts, including the Department of Government Efficiency initiative, or the workforce reduction plans from the Office of Management and Budget. Some of these cuts will likely be included in an eventual rescission package requiring Congressional approval.

Finally, the administration has yet to release its budget for fiscal year 2026 that will lay the foundation for subsequent requisite Congressional action on next year's budget. Greater clarity on the shape of budget policy will inform our view of the U.S.'s fiscal and debt trajectory.

Related Research

• U.S. Sovereign Brief: Post-Election Policy Outcomes Will Be Key For Creditworthiness, Oct. 15, 2024
• U.S. 'AA+/A-1+' Sovereign Ratings Affirmed; Outlook Remains Stable, March 27, 2024