New Delhi [India]: A new report by Fitch Ratings suggests that increased tariff revenues are expected to help reduce the US budget deficit in 2025. However, the impact may be limited due to the broader economic slowdown and proposed tax cuts.
The credit rating agency noted that despite short-term fiscal benefits from the tariffs, long-term stabilization of US debt and GDP will be difficult unless structural spending pressures are addressed.
The tariffs introduced on April 2 raise the US Effective Tariff Rate (ETR) to approximately 25 percent—significantly higher than the 18 percent increase anticipated in Fitch’s March 2025 Global Economic Outlook.
Fitch highlighted that the sustainability of these gains will depend on how exemptions for key sectors such as pharmaceuticals and semiconductors are handled, and whether escalating trade tensions trigger retaliatory measures from trading partners.
The report estimated that the ETR’s jump from 2.4 percent last year could notionally translate to around USD 800 billion in revenue—about 2.5 percent of US GDP—assuming steady import volumes. Even if import volumes decline, the tariff hike is still expected to generate substantial revenues in 2025.
“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,” the report warned.
Fitch also cautioned that a deeper economic downturn could eventually offset the revenue benefits. A slowdown would likely reduce non-tariff tax revenues and trigger increased government spending through automatic stabilizers such as unemployment benefits and social welfare programs.
“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 stated.
The report emphasized that large-scale spending cuts remain uncertain. Proposed federal workforce reductions by the Department of Government Efficiency (DOGE) may yield some savings, but these are limited, as wages and benefits for federal civilian workers make up less than 5 percent of total government expenditures.
For the first five months of FY25 (ending September 30, 2025), spending was dominated by social security (21%), Medicare (15%), and 13% each on national defense, health, and net interest.
According to the same report, the US federal deficit already stood at USD 1.15 trillion during the first five months of FY25, compared to USD 1.83 trillion for the entirety of FY24—indicating worsening fiscal health.