WASHINGTON (AP) — Donald Trump has substantial plans for the economy — and a substantial debt problem that will pose an obstacle to achieving those plans.
Trump has bold ideas on tax cuts, tariffs and other programs, but high interest rates and the price of paying off the federal government’s existing debt could limit his options.
Not only is the national debt at about $36 trillion, but the rise in inflation following the coronavirus pandemic has also driven up the government’s borrowing costs, so that debt service next year will significantly exceed national security spending.
The higher cost of servicing the debt gives Trump less room for maneuver in the federal budget as he pursues income tax cuts. It’s also a political challenge because higher interest rates have made buying a home or a novel car more high-priced for many Americans. And the problem of high costs helped Trump retake the presidency in the November election.
“It is clear that current levels of debt are putting upward pressure on interest rates, including mortgage rates for example,” said Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center. “The cost of housing and food will rise. The impact will be increasingly felt by households in a way that will negatively impact our future economic prospects.”
Akabas emphasized that debt service is already crowding out government spending on basic needs such as infrastructure and education. About one in five dollars spent by the government now goes toward paying back borrowed money to investors rather than investing in future economic growth.
It’s an issue on Trump’s radar. In his statement on the selection of billionaire investor Scott Bessent as his Treasury secretary, the Republican president-elect said Bessent would “help curb the unsustainable path of federal debt.”
Debt service costs and higher overall debt are complicating Trump’s efforts to renew his 2017 tax cuts, many of which will expire after next year. The increased debt from these tax cuts could drive up interest rates, making debt service even more high-priced and minimizing the benefits the tax cuts could bring to growth.
“It is clearly irresponsible to reverse the same tax cuts after the deficit has tripled,” said Brian Riedl, a senior fellow at the Manhattan Institute and a former Republican congressman. “Even Republicans in Congress are looking behind the scenes for ways to limit the president’s ambitions.”
Democrats and many economists say Trump’s income tax cuts disproportionately benefit the affluent, depriving the government of revenue it needs for programs for the middle class and the destitute.
“The president-elect’s tax policy ideas will increase the deficit because they lower taxes on those with the highest ability to pay, such as corporations, whose tax rate he wants to cut even further to 15%,” said Jessica Fulton, vice president of policy Joint Center for Political and Economic Studies, a Washington-based think tank focused on issues facing communities of color.
Trump’s team insists he can make the bill work.
“The American people overwhelmingly re-elected President Trump and charged him with implementing the promises he made during his campaign, including lowering prices. He will deliver,” said Trump transition spokeswoman Karoline Leavitt.
When Trump was last in the White House in 2020, the federal government was spending $345 billion annually to service the national debt. Tax cuts and pandemic aid were able to drive up national debt because the average interest rate was low and repayment costs remained manageable even as debt increased.
Projections from the Congressional Budget Office suggest the cost of servicing the debt could top $1 trillion next year. This is more than the forecast defense spending. The total is also higher than nondefense spending on infrastructure, food aid and other programs directed by Congress.
The reason for the increased cost of servicing debt was higher interest rates. In April 2020, as the government borrowed trillions of dollars to combat the pandemic, the 10-year Treasury yield fell as low as 0.6%. They are now 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 has a track record of mighty economic growth and successful avoidance of a recession as the Federal Reserve sought to reduce inflation. Nevertheless, the deficits during his time in office were unusually high. That’s partly due to his own initiatives to boost manufacturing and combat climate change, as well as the legacy of Trump’s previous tax cuts.
People close to Trump and Republican lawmakers are already looking for ways to reduce government spending to minimize debt and lower interest rates. They have attacked Biden on deficits and inflation, setting the stage for whether they can persuade Trump to act.
Elon Musk and Vivek Ramaswamy, the wealthy businessmen who led Trump’s efforts to cut government costs, have suggested that the novel administration should simply refuse to spend some of the money approved by Congress. It’s an idea that Trump has also supported, but one that would likely lead to court challenges because it would undermine Congress’ authority.
Russell Vought, the White House budget director during Trump’s first term and Trump’s decision to take the reins, presented an alternative 2023 budget proposal that included more than $11 trillion in spending cuts over 10 years to potentially generate a surplus.
Michael Faulkender, a finance professor who served in Trump’s Treasury Department, told a congressional committee in March that all energy and environmental components of Biden’s Inflation Reduction Act should be repealed starting in 2022 to reduce deficits.
Trump has also talked about 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 imposing work requirements to reduce Medicaid spending.
The White House was last pressured to reduce debt service costs by high interest rates about three decades ago, at the start of Democrat Bill Clinton’s presidency. Higher yields on the 10-year Treasury note led Clinton and Congress to reach an agreement on deficit reduction, eventually leading to a budget surplus beginning in 1998.
Clinton political adviser James Carville joked at the time about how bond investors who drove up borrowing rates for the U.S. government could humiliate the commander in chief.
“I used to think that if there was a reincarnation, I would want to come back as a president, a pope or a .400 baseball hitter,” Carville said. “But now I would like to come back as a bond market. You can intimidate anyone.”
