WASHINGTON — WASHINGTON (AP) — Donald Trump has big plans for the economy – and a major debt problem that will be a hurdle to making them happen.
Trump has bold ideas about it tax cuts, tariffs and other programsbut high interest rates and the price of paying back the federal government’s existing debt could limit what he can do.
Not only is the federal debt of about $36 trillion, but the spike in inflation following the coronavirus pandemic has pushed up government borrowing costs so much that debt service will easily exceed national security spending next year.
The higher costs of servicing the debt give Trump less leeway with the federal budget as he pursues income tax cuts. It’s also a political challenge, because higher interest rates have made it more expensive for many Americans to buy a house or a new car. And the issue of high costs helped Trump regain the presidency in the November election.
“It’s clear that current debt levels are putting upward pressure on interest rates, including mortgage rates, for example,” said Shai Akabas, executive director of the Bipartisan Policy Center’s economic policy program. “The cost of housing and groceries will rise and will increasingly be felt by households in a way that will negatively impact our economic prospects going forward.”
Akabas emphasized that debt service has already begun to crowd out government spending on basic needs such as infrastructure and education. About 1 in 5 dollars the government spends is now used to pay back investors for borrowed money, rather than enabling investments in future economic growth.
It’s an issue on Trump’s radar. In his statement about choosing a billionaire investor Scott Bessent to be his Minister of Financesaid the Republican president-elect Bersent would “help curb the unsustainable path of federal debt.”
The cost of debt service combined with higher overall debt is complicating Trump’s efforts to renew his 2017 tax cuts, many of which are set to expire after next year. The higher debt burden from these tax cuts could raise interest rates, making debt servicing even more expensive and minimizing any benefits the tax cuts could bring to growth.
“It is clearly irresponsible to implement the same tax cuts after the budget deficit has tripled,” said Brian Riedl, a senior fellow at the Manhattan Institute and a former Republican congressional staffer. “Even Republicans in Congress are looking behind the scenes for ways to scale back the president’s ambitions.”
Democrats and many economists say Trump’s income tax cuts disproportionately benefit the wealthy, depriving the government of revenue needed for programs for the middle class and the poor.
“The president-elect’s tax policy ideas will widen the budget deficit because they will lower taxes on those with the highest means, such as the corporations whose tax rate he has proposed lowering even further to 15 percent,” said Jessica Fulton, vice president of US state television. policy from the Joint Center for Political and Economic Studies, a Washington-based think tank that focuses on issues facing communities of color.
Trump’s team insists he can make the math work.
“The American people re-elected President Trump by a wide margin, giving him a mandate to implement the promises he made during the campaign, including lowering prices. He will make it happen,” said Karoline Leavitt, spokeswoman for the Trump transition.
When Trump was last in the White House in 2020, the federal government was spending $345 billion annually to pay down the national debt. It was possible to boost the national debt with tax cuts and pandemic aid because average interest rates were low, so repayment costs were manageable even as debt levels rose.
Projections from the Congressional Budget Office indicate that debt service costs could exceed $1 trillion next year. That is more than the expected expenditure on defense. The total also exceeds non-defense spending on infrastructure, food assistance and other programs directed by Congress.
What has fueled the higher costs of servicing debt are higher interest rates. In April 2020, as the government borrowed trillions of dollars to tackle the pandemic, the 10-year Treasury yield fell to a low of 0.6%. They now stand at 4.4% and have risen since September as investors expect Trump’s income tax cuts to add several trillion dollars to projected deficits.
Democratic President Joe Biden can point to strong economic growth and the successful avoidance of a recession as the Federal Reserve tried to curb inflation. Yet deficits rose to unusually high levels during his time in office. That’s partly thanks to his own initiatives to boost manufacturing and tackle climate change, as well as the legacy of Trump’s previous tax cuts.
People in Trump’s inner circle, as well as Republican lawmakers, are already looking for ways to cut government spending to minimize debt and lower interest rates. They have attacked Biden over deficits and inflation, setting the stage for whether they can convince Trump to take action.
Elon Musk And Vivek Ramaswamythe wealthy businessmen leading Trump’s efforts to reduce government costshave suggested that the new administration should simply refuse to spend any of the money approved by Congress. It’s an idea that Trump also supports, but is likely to face challenges in court because it would undermine Congress’ authority.
Russell Voughtthe White House budget director during Trump’s first term and Trump’s pick to lead it again has released an alternative 2023 budget proposal with more than $11 trillion in cuts over ten years to potentially generate a surplus .
Michael Faulkender, a finance professor who worked in Trump’s Treasury Department, told a congressional committee in March that all energy and environmental components of Biden’s 2022 Inflation Reduction Act should be repealed to reduce deficits.
Trump has also discussed tariffs on imports to raise revenue and reduce deficits, while some Republican lawmakers, such as House Budget Committee Chairman Jodey Arrington, R-Texas, have discussed adding work requirements to limit Medicaid spending .
About three decades ago, during the early days of Democrat Bill Clinton’s presidency, the White House was last pressured by high interest rates to tackle debt service costs. The higher yields on ten-year government bonds led Clinton and Congress to reach an agreement on deficit reduction, which eventually led to a budget surplus from 1998 onwards.
Clinton’s political adviser James Carville joked at the time about how bond investors driving up interest rates for the U.S. government could humiliate the commander in chief.
“I used to think that if there was reincarnation, I wanted to come back as president or pope or as a .400 baseball player,” Carville said. “But now I would like to come back as the bond market. You can intimidate anyone.”