Debt could throw wrench into Trump’s plans

WASHINGTON — Donald Trump has big plans for the economy — and a big debt problem that will be a hurdle to delivering on them.

Trump has bold ideas on tax cuts, tariffs and other programs, but high interest rates and the price of repaying the federal government’s existing debt could limit what he’s able to do.

The federal debt stands at roughly $36 trillion, and the spike in inflation after the coronavirus pandemic has pushed up the government’s borrowing costs, making debt service next year likely to exceed spending on national security.

The higher cost of servicing the debt reduces Trump’s flexibility with the federal budget as he seeks income tax cuts. It’s a political challenge as well, since rising interest rates have made it more expensive for many Americans to buy homes or new cars. These increased costs contributed to Trump’s reclaiming the presidency in November’s election.

“It’s clear the current amount of debt is putting upward pressure on interest rates, including mortgage rates,” said Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center. “The cost of housing and groceries is going to affect households in ways that could harm our economic prospects in the future.”

Akabas notes that debt service is already beginning to crowd out government spending on essential services such as infrastructure and education. About one in five dollars spent by the government is currently used to repay investors for borrowed money, rather than facilitating investments in future economic growth.

This is a concern for Trump. In announcing his choice of billionaire investor Scott Bessent as his treasury secretary, the Republican president-elect emphasized that Bessent would “help curb the unsustainable path of Federal Debt.”

The intricacies of debt service costs combined with the higher total debt complicate Trump’s ambitions to renew his 2017 tax cuts, many of which will expire after next year. The additional debt from these tax cuts could lead to higher interest rates, further escalating debt service costs and reducing any benefits the tax cuts could provide for growth.

“Clearly, it’s irresponsible to push for the same tax cuts after the deficit has tripled,” remarked Brian Riedl, a senior fellow at the Manhattan Institute and a former Republican congressional aide. “Even congressional Republicans are looking for ways to scale down the president’s ambitions.”

Democrats and numerous economists have pointed out that Trump’s income tax cuts disproportionately benefit the wealthy, depriving the government of revenues critical for programs aimed at middle-class and low-income Americans.

“The president-elect’s tax policies will increase the deficit by reducing taxes for those best able to pay, such as corporations, for which he proposes a further reduction to a 15% tax rate,” noted Jessica Fulton, vice president of policy at the Joint Center for Political and Economic Studies.

Despite the challenges, Trump’s team is confident he can manage the situation. “The American people re-elected President Trump by a resounding margin, giving him a mandate to implement the promises made on the campaign trail, including lowering prices. He will deliver,” stated Karoline Leavitt, the Trump transition spokeswoman.

During Trump’s last term in the White House, the federal government was spending $345 billion annually on servicing the national debt. The feasibility of incurring national debt alongside tax cuts and pandemic aid was made possible by the low average interest rates, allowing manageable repayment costs even amid rising debt levels.

Projections from the Congressional Budget Office indicate that next year’s debt service costs could exceed $1 trillion, surpassing projected spending on defense and nondefense expenditures like infrastructure, food aid, and other programs overseen by Congress.

The increased cost of debt service has been driven by rising interest rates. In April 2020, as the government borrowed trillions to combat the pandemic, the yield on 10-year Treasury notes plunged to as low as 0.6%. Today, that yield stands at 4.4%, significantly rising since September as investors anticipate Trump adding trillions more to projected deficits through his proposed income tax cuts.

Democratic President Joe Biden can cite robust economic growth and the successful sidestepping of recession while the Federal Reserve has worked to reduce inflation. Nevertheless, deficits have remained unusually high during his presidency, stemming from both his initiatives to bolster manufacturing and address climate change, as well as the lingering impact of Trump’s prior tax cuts.

Individuals in Trump’s circle, along with Republican legislators, are already exploring ways to trim government spending to mitigate debt and lower interest rates. They have criticized Biden regarding deficits and inflation, setting the stage for a possible push for Trump to adopt significant spending cuts.

Wealthy figures like Elon Musk and Vivek Ramaswamy, who are advising Trump on cost-cutting measures, have suggested that the incoming administration could simply decline to utilize some of the funds Congress has authorized. While this approach has received Trump’s support, it may raise legal complications as it challenges congressional authority.