Donald Trump has big plans for the economy
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.
Not only is the federal debt at roughly $36 trillion, but the spike in inflation after the coronavirus pandemic has pushed up the government’s borrowing costs such that debt service next year will easily exceed spending on national security.
The higher cost of servicing the debt gives Trump less room to maneuver with the federal budget as he seeks income tax cuts. It’s also a political challenge because higher interest rates have made it costlier for many Americans to buy a home or new automobile. And the issue of high costs helped Trump reclaim the presidency in November’s election.
“It’s clear the current amount of debt is putting upward pressure on interest rates, including mortgage rates for instance”, said Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center. “The cost of housing and groceries is going to be increasingly felt by households in a way that are going to adversely affect our economic prospects in the future.”
Akabas stressed that the debt service is already starting to crowd out government spending on basic needs such as infrastructure and education. About 1 in 5 dollars spent by the government are now repaying investors for borrowed money, instead of enabling investments in future economic growth.
It’s an issue on Trump’s radar. In his statement on choosing billionaire investor Scott Bessent to be his treasury secretary, the Republican president-elect said Bessent would “help curb the unsustainable path of Federal Debt.”
The debt service costs along with the higher total debt complicate Trump’s efforts to renew his 2017 tax cuts, much of which are set to expire after next year. The higher debt from those tax cuts could push interest rates higher, making debt service even costlier and minimizing any benefits the tax cuts could produce for growth.
“Clearly, it’s irresponsible to run back the same tax cuts after the deficit has tripled,” said Brian Riedl, a senior fellow at the Manhattan Institute and a former Republican congressional aide.
