Debt could throw wrench into Trump’s plans
Donald Trump has big plans for the economy — and a significant debt problem that could hinder his ability to implement those plans. With bold ideas on tax cuts, tariffs, and various programs, the current high interest rates alongside the federal government’s existing debt repayments may limit his options. The federal debt stands at approximately $36 trillion, and the spike in inflation following the coronavirus pandemic has increased the government’s borrowing costs. Consequently, debt servicing next year is expected to exceed spending on national security.
The growing cost of servicing the debt reduces the flexibility Trump has with the federal budget, particularly regarding his goal for income tax cuts. This situation presents a political challenge as well, as elevated interest rates are making it more expensive for many Americans to purchase homes or new automobiles. These financial pressures played a role in Trump’s election campaign, allowing him to regain the presidency in the recent election.
“It’s clear the current amount of debt is putting upward pressure on interest rates, including mortgage rates,” remarked an expert from the Bipartisan Policy Center. “The cost of housing and groceries will increasingly impact households, potentially jeopardizing our future economic outlook.” This individual highlighted that the rising debt service costs are already starting to crowd out essential government spending on infrastructure and education. Presently, roughly 20% of government expenditures are allocated to repaying investors for borrowed money, rather than investing in future economic growth.
The debt issue is clearly on Trump’s radar. In a statement regarding the appointment of billionaire investor Scott Bessent as his treasury secretary, Trump indicated that Bessent would “help curb the unsustainable path of Federal Debt.” However, managing the debt service costs alongside the overall debt remains a significant hurdle for Trump as he aims to renew his 2017 tax cuts, many of which are set to expire after next year. The increase in debt from these tax cuts could further elevate interest rates, thus increasing debt service expenses and diminishing any potential growth benefits from the tax cuts.
“Clearly, it’s irresponsible to replicate the same tax cuts after the deficit has tripled,” stated a senior fellow at the Manhattan Institute and former Republican congressional aide. “Even congressional Republicans are privately discussing methods to scale back the president’s ambitions.” Critics, including many economists and Democrats, argue that Trump’s tax cuts disproportionately favor the wealthy, which diminishes the government’s revenue needed for crucial programs aimed at the middle class and poorer citizens. “The president-elect’s tax policy proposals will likely increase the deficit by reducing taxes for those most able to pay, including corporations,” noted a policy expert at a Washington-based think tank focusing on community issues.
Despite these challenges, Trump’s team remains optimistic about his plans. “The American people re-elected President Trump with a clear mandate to fulfill the promises he made during his campaign, including lowering prices. He will deliver,” stated the Trump transition spokeswoman.
During Trump’s previous tenure in the White House in 2020, the federal government was spending $345 billion annually to service the national debt. Tax cuts and pandemic relief efforts allowed for increased national debt due to historically low average interest rates that kept repayment costs manageable even with rising debt levels. However, projections from the Congressional Budget Office indicate that debt service costs may surpass $1 trillion next year, exceeding anticipated defense spending and surpassing nondefense spending on infrastructure, food aid, and other congressional programs.
The surge in debt servicing costs has been largely driven by rising interest rates. When the government borrowed trillions to combat the pandemic in April 2020, the yield on 10-year Treasury notes plummeted to as low as 0.6%. Today, those rates have risen to 4.4%, reflecting expectations that Trump may add trillions to projected deficits with proposed income tax cuts.
Democratic President Joe Biden can point to robust economic growth and the successful avoidance of a recession as the Federal Reserve worked to curb inflation, but deficits have remained at unusually high levels during his administration. This has been due in part to his initiatives aimed at boosting manufacturing and addressing climate change, along with the lasting impacts of Trump’s earlier tax cuts.
Individuals close to Trump, along with Republican lawmakers, are already exploring ways to reduce government spending to mitigate debt and lower interest rates. They have criticized Biden for current deficit levels and inflation, gearing up for discussions about potential reductions in spending. Notably, influential figures such as Elon Musk and Vivek Ramaswamy have suggested that the incoming administration should refuse to spend certain funds approved by Congress. While this idea, which Trump has also supported, may challenge the authority of Congress and provoke legal disputes, it indicates a focus on addressing the debt issue from within Trump’s orbit.
