Washington (AP)Donald Trump has ambitious economic goals, but meeting them will be difficult due to his massive debt problem.
Trump has ambitious plans for tax cuts, tariffs, and other policies, but his options may be limited by high interest rates and the cost of paying down the federal government’s current debt.
In addition to the fact that the federal debt is over $36 trillion, the increase in inflation following the coronavirus outbreak has increased the cost of borrowing for the government to the point where debt servicing next year will easily surpass national defense spending.
Trump has less wiggle room with the federal budget as he looks for income tax cuts because of the increased cost of debt servicing. Because rising loan rates have made it more expensive for many Americans to purchase a new car or home, it’s also a political dilemma. Additionally, Trump was able to regain the president in the November election thanks to the problem of excessive expenditures.
According to Shai Akabas, executive director of the Bipartisan Policy Center’s economic policy program, it is evident that the current level of debt is driving higher interest rates, especially mortgage rates. Households will increasingly be impacted by the cost of goods and housing, which will negatively impact our future economic prospects.
FILE – Republican presidential nominee former President Donald Trump, left, listens as investor Scott Bessent speaks on the economy in Asheville, N.C., Aug. 14, 2024. (AP Photo/Matt Kelley, File)
Image courtesy of Matt Kelley/Associated Press
Akabas emphasized that government investment on essentials like infrastructure and education is already beginning to be displaced by debt payments. Instead of funding investments in future economic growth, the government today spends almost one out of every five dollars paying back investors for money they have borrowed.
Trump is aware of the problem. The Republican president-elect indicated that Scott Bessent, a millionaire investor, will help stop the Federal Debt’s unsustainable trajectory when he announced his appointment as Treasury Secretary.
Trump’s attempts to extend his 2017 tax cuts, many of which are scheduled to expire after next year, are made more difficult by the debt servicing expenses and the increased total debt. The increased debt resulting from those tax cuts may cause interest rates to rise, increasing the cost of debt service and reducing any growth-promoting effects of the tax cuts.
Brian Riedl, a senior scholar at the Manhattan Institute and a former Republican legislative assistant, stated that it is obviously reckless to reinstate the same tax cuts after the deficit has tripled. Behind the scenes, even Republicans in Congress are searching for measures to curtail the president’s aspirations.
Trump’s income tax cuts, according to Democrats and many economists, disproportionately benefit the wealthiest, depriving the government of funds for middle-class and poor programs.
According to Jessica Fulton, vice president of policy at the Joint Center for Political and Economic Studies, a Washington-based think tank that addresses issues affecting communities of color, the president-elect’s proposed tax policy will increase the deficit because it will lower taxes for those with the greatest financial means, such as corporations, whose tax rate he has proposed lowering even further to 15%.
Trump’s team maintains that he can solve the equation.
President Trump was mandated to carry out the promises he made during the campaign, including cutting costs, after the American people overwhelmingly re-elected him. The Trump transition spokesperson, Karoline Leavitt, stated that he will deliver.
The federal government was paying $345 billion a year to pay down the national debt when Trump was last in office in 2020. Due to the low average interest rate, which made repayment costs reasonable even as debt levels increased, tax cuts and pandemic relief made it viable to increase the national debt.
According to estimates from the Congressional Budget Office, debt payment expenses may surpass $1 trillion in the upcoming year. That exceeds the anticipated defense budget. Additionally, the sum exceeds nondefense expenditures on food assistance, infrastructure, and other congressionally directed programs.
Higher interest rates have been the main factor driving up the cost of debt servicing. The rate on 10-year Treasury notes dropped as low as 0.6% in April 2020, during a time when the government was borrowing trillions of dollars to combat the pandemic. Since September, they have risen to 4.4% as investors anticipate that Trump’s income tax cuts will add several trillions of dollars to expected deficits.
As the Federal Reserve worked to lower inflation, Democratic President Joe Biden can claim to robust economic growth and effectively avoided a recession. Nevertheless, during his reign, deficits ran at abnormally high levels. The legacy of Trump’s prior tax cuts as well as his own efforts to promote manufacturing and combat climate change are partly to blame for that.
Republican lawmakers and those close to Trump are already looking for ways to cut government spending in order to lower interest rates and shrink the debt. In order to determine whether they can convince Trump to act, they have criticized Biden for the inflation and deficits.
The rich businessmen who are spearheading Trump’s efforts to reduce government spending, Elon Musk and Vivek Ramaswamy, have suggested that the incoming administration just refuse to spend part of the funds that Congress has approved. Trump has also supported the proposal, but since it would question congressional authority, it would probably face legal hurdles.
In order to possibly create a surplus, Russell Vought, the White House budget director during Trump’s first term and Trump’s nominee to run it again, released a different planned budget for 2023 that calls for spending cutbacks totaling more than $11 trillion over ten years.
In March, Michael Faulkender, a professor of finance who worked in Trump’s Treasury Department, told a congressional committee that in order to lower deficits, Biden’s Inflation Reduction Act of 2022 should be repealed in its entirety, including its energy and environmental provisions.
Some Republican members, like House Budget Committee Chairman Jodey Arrington, R-Texas, have talked of imposing work requirements to reduce Medicaid costs, while Trump has also advocated for import tariffs to raise money and lower deficits.
About thirty years ago, during the beginning of Democrat Bill Clinton’s presidency, the White House was last compelled to confront debt payment issues due to high interest rates. Clinton and Congress agreed to reduce the deficit as a result of higher returns on the 10-year Treasury notes, which resulted in a budget surplus beginning in 1998.
James Carville, Clinton’s political strategist at the time, made a joke about how the commander in chief may be humbled if bond markets raised borrowing rates for the US government.
Carville stated, “I used to believe that if there was reincarnation, I wanted to return as a.400 baseball hitter, the president, or the pope.” However, I would like to return as the bond market presently. Everyone can be intimidated by you.
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