New Delhi [India], April 9 (ANI): Tariff revenues will help narrow the US budget deficit in 2025, but the hit to economic growth and additional tax cuts are likely to limit the size of any lasting fiscal benefit, Fitch Ratings said in a report.

The credit rating firm added that stabilising US debt and GDP will be challenging as long as long-term spending pressures remain unaddressed.

The tariffs announced on April 2 raise the US Effective Tariff Rate (ETR) to about 25 per cent, compared with the already sharp increase to 18 per cent assumed in Fitch's Global Economic Outlook for March 2025.

It remains to be seen whether product-specific exemptions, mostly covering pharmaceuticals and semiconductors, are maintained, and if retaliatory measures see trade tensions escalate further, the credit rating firm said.

The magnitude of the ETR increase from 2.4 per cent last year is notionally equivalent to about USD800 billion (2.5 per cent of GDP) at steady import volumes and will lead to a meaningful revenue impact this year even at lower import volumes.

A higher ETR implies a bigger revenue boost, all else equal. However, we believe the tariffs significantly raise US recession risks and constrain the Federal Reserve's ability to lower interest rates further given the expected shock to prices.

A sharper economic slowdown would significantly weigh on non-tariff revenues and increase spending via automatic stabilizers, added the report.

The firm says that these effects would lag the immediate revenue boost from tariffs, but they would be evident by 2026, along with negative spillovers from financial market volatility.

'We assume tariff income will be used for additional tax cuts. President Donald Trump has proposed further reductions in corporate taxes, as well as exemptions for social security benefits for retirees, tips and overtime work. Additional increases in state and local tax deductions are also under discussion,' Fitch Ratings added in the release.

The report added that the prospects for large-scale expenditure reductions appear uncertain. DOGE's moves to shrink the federal workforce will lead to some savings, but federal civilian workers' wages and benefits represent less than 5 per cent of total government spending. For the first five months of FY25 (fiscal year to September 30, 2025), the share of federal government spending was 21 per cent for social security, 15 per cent for Medicare, and 13 per cent each on national defence, health, and net interest.

Data for the same period suggest a significant deterioration, with the underlying federal deficit at USD1.15 trillion, compared to USD1.83 trillion for the whole of FY24, the report added. (ANI)