Investing.com -- Goldman Sachs analysts believe that fiscal policy will not be able to counteract the economic drag caused by new U.S. tariffs, citing three main reasons.
While personal and corporate tax changes under discussion in Congress could provide a modest boost to growth, they are unlikely to offset the immediate impact of tariffs, said Goldman Sachs.
The first reason is timing. The bank says the fiscal package currently under discussion is unlikely to take effect before the tariffs are implemented.
"At this point, we think the legislation could pass by late July or early August, but it could slip to September," Goldman Sachs noted.
The bank adds that since tariffs are expected to take effect much sooner, any potential fiscal stimulus would lag behind and fail to cushion the near-term economic impact.
The second issue is the nature of the fiscal package itself. Goldman Sachs analysts argue that the upcoming legislation is "likely to consist mainly of an extension of existing tax cuts with limited new tax cuts."
While some lawmakers may be inclined to approve larger tax cuts in response to the expected rise in tariff revenue, Goldman Sachs does not see signs of significant new measures that would counteract the drag from higher trade barriers.
Lastly, Goldman Sachs points to additional risks created by fiscal policy, including a possible government shutdown and the need to raise the debt limit.
"Congress might have a harder time avoiding the next shutdown (Sep. 30 deadline) than it did the last," the analysts wrote, adding that spending cuts tied to deficit reduction efforts could weigh on growth and employment.
Given these factors, Goldman Sachs maintains that while fiscal policy may provide some support, it will not be sufficient to fully offset the economic disruption caused by tariffs.