Debt could throw wrench into Trump’s plans
Donald Trump has big plans for the economy, but he also faces a significant debt issue that could hinder his ability to execute them. Trump’s ambitious proposals include tax cuts, tariffs, and various programs, but high interest rates combined with the cost of repaying the federal government’s existing debt might limit his options.
The federal debt currently stands at approximately $36 trillion. Following the spike in inflation that occurred after the coronavirus pandemic, the government’s borrowing costs have surged, with debt service in the coming year likely to exceed national security spending. This climb in servicing costs reduces Trump’s flexibility with the federal budget as he aims to implement income tax cuts.
Additionally, the rise in interest rates has made it more expensive for many Americans to purchase homes or new vehicles. The impact of these high costs was a pivotal issue during the recent election cycle, enabling Trump to reclaim the presidency. Shai Akabas, executive director of the economic policy program at a prominent think tank, emphasized that the increasing debt level is exerting upward pressure on interest rates, which is affecting everyday expenses such as housing and groceries.
Furthermore, Akabas noted that the debt service is starting to crowd out essential government spending on necessary services like infrastructure and education. It is estimated that about 20% of government spending is allocated to paying investors for borrowed funds rather than investing in future economic growth.
This is certainly on Trump’s radar. Upon choosing billionaire investor Scott Bessent as his treasury secretary, he expressed optimism that Bessent would help steer the federal debt away from its current unsustainable trajectory. The costs associated with servicing this debt, alongside the increased total debt, complicate Trump’s agenda to renew his 2017 tax cuts, which are set to expire soon.
There is a rising concern that increased debt from these tax cuts could further elevate interest rates, creating a cycle that makes debt servicing even more costly and diminishing any potential growth benefits from the cuts. “It’s clearly irresponsible to push forward with the same tax cuts after the deficit has tripled,” cautioned a fiscal policy expert. Moreover, some congressional Republicans may seek to temper Trump’s ambitious plans.
Many Democrats, along with several economists, assert that Trump’s tax policy disproportionately favors the wealthy, resulting in a decrease in government revenues that are necessary for funding programs aimed at the middle class and lower-income individuals. Critics argue that tax cuts for high earners, particularly corporations, will exacerbate the deficit.
Despite these concerns, Trump’s team remains confident in their fiscal strategy. They assert that the American public re-elected Trump with a strong mandate to fulfill his campaign promises, which include significant price reductions.
During Trump’s previous presidency, the annual cost to service the national debt was $345 billion. At that time, the government could manage to increase the national debt while implementing tax cuts and pandemic relief because the interest rates were relatively low, making repayments feasible. However, the Congressional Budget Office now predicts that debt service costs could surpass $1 trillion next year, exceeding allocated funds for defense and other nondefense expenditures.
Interest rates have risen sharply; for instance, the yield on 10-year Treasury notes plummeted to as low as 0.6% in April 2020 during the pandemic, but it now stands at about 4.4%. This surge is attributed to expectations that Trump will increase deficits substantially with his proposed tax cuts.
The current Democratic administration can point to significant economic growth and the avoidance of recession amid Fed actions to control inflation. However, deficits remain high due not only to Biden’s initiatives but also as a result of Trump’s prior tax cuts.
As Trump navigates these challenges, key individuals within his administration and Republican lawmakers are already looking into strategies for reducing government spending to alleviate debt pressures and control interest rates. They have criticized the current administration for high deficits and inflation, advocating for action to mitigate these issues.
Notably, influential figures like Elon Musk and Vivek Ramaswamy have suggested that Trump’s incoming administration should reconsider spending commitments passed by Congress. This approach aligns with Trump’s own sentiments but could lead to constitutional disputes given the implications for congressional authority.
