Trump’s bill and the growing debt pile
President Trump’s Big Beautiful Bill has hit the headlines for a multitude of reasons, not least its eye-catching name. Of central concern is that the Big Beautiful Bill, or BBB (an acronym, not the US’ credit rating when the Bill comes into force), will add to enormous sums to the US government’s debt. In the context of recent spending, and US tax revenue, should we be seriously worried about the bill’s impact?
When talking about government deficits, it is easy to get lost in all the noughts and commas. People understand thousands and tens of thousands but begin to become unmoored when it comes to millions, hundreds of millions, billions, and trillions. To give you an idea of just how big the difference between a million and a billion is, try to imagine that you stood outside Grand Central Station in New York and gave away a dollar to every passer-bye.
If you gave away a dollar a second, 24 hours a day, seven days a week, for a year you would give away nearly $32m. If you could keep up this up, it would take over 30 years to give away a billion dollars. A billion takes a long time one dollar at a time – and a trillion is a thousand billion.
The US Federal government for fiscal year 2024 (ended September 2024) had tax revenues of $4,918bn and spent $6,751bn, giving a deficit for last year of $1,833bn. The US government’s revenues and expenditure for 2024 are shown in the graphic below; the deficit is depicted in orange (not red) as a balancing item. This is the amount the Federal government borrowed in 2024 using long-term US Treasury bonds and shorter term Treasury bills.
Source: Final Monthly Treasury Statement: US Department of the Treasury, September 2024
One of the biggest outlays in the chart above is the interest on the accumulated national debt. The net interest bill is larger than the Medicare bill or the cost of the US military. The total accumulated national debt has ticked past the $37,00bn mark, and is growing fast. The website www.usdebtclock.org gives you some impression as to the staggering pace at which US debt is increasing – by about $1m every 20 seconds. As the debt accumulates, the interest bill will consume an ever larger portion of government revenues.
It would be wrong to blame any US political party for amassing this deficit, as it is product of a combination of spending increases and tax cuts by successive administrations. The last time the US Federal government ran a surplus was in 2001 as the chart below demonstrates. Unsurprisingly, the national debt surged after the 2008 Financial Crisis and again during COVID.
Source: National Deficit | U.S. Treasury Fiscal Data updated to 09/2024
The Congressional Budget Office has 30-year forecasts of government revenues and expenditures. Before the BBB, they forecast that the annual government deficit would dip a bit before picking up towards the end of the decade due mainly to increased interest charges. In these forecasts they assume interest rates remain low and that the economy grows at an average rate of 2% a year.
President Trump’s BBB is a mix of some deep spending cuts combined with some even bigger tax cuts. Some departments of the US government get hit hard like the departments of Agriculture, Education and Energy and Commerce, partially offset by increases for Homeland Security, Defence and the Judiciary, which administers immigration. Within Energy and Commerce there are cuts that quickly build to $100bn, mainly from savings on Medicaid, which has seen its cost double as a share of GDP in the last 25 years. This would normally draw political opposition, but which President Trump seems to have successfully headed off.
The tax cuts include about $60bn a year for tax on overtime and tips, and from the removal of tax on some car loans. Many of the BBB’s other tax cuts, which sum to about $400bn a year, make permanent Trump’s temporary tax cuts passed in his first administration.
The Congressional Budget Office estimates all these ins and outs will increase the national deficit by an eye-watering $3,000bn over the next ten years, including extra interest payments of $166bn. Set against the deficit of $1,830bn in 2024 alone the ten-year projected increase seems relatively benign and not quite the giveaway that it has been painted in the press. There is the assumption that there will be no slowdown, but nevertheless the annual deficit is much more muted than during the Biden administration.
The Congressional Budget Office predicts that the deficit will rise from 117% of GDP to 124% of GDP. It is not clear using annual GDP to measure a stock of debt is meaningful. If you look at the US’s long-term debt as if it was like your private mortgage, we would probably say that a mortgage of 1.24x annual salary wasn’t too bad. Looking at cash outlay as a percentage of annual GDP is more meaningful. The interest cost on the national debt is projected to increase from 3.2% of GDP today to 4.1% of GDP by 2035. This is manageable, but ultimately the debt cannot go on growing and will need to be addressed by some tough political choices.
So, the BBB isn’t causing us sleepless nights at present, and we certainly won’t be altering portfolios off the back of it as things stand. Somewhere down the line the US government will need to bump-up taxes or cut spending further, but that day is not imminent. Whatever we may think of President Trump’s style, he has led the way and cut some of the big government spending departments, which is more than any other administration has done for a while. And yet, he is more focused on delivering generous tax cuts than managing a growing debt pile. Once again he is delivering tax cuts for those who can afford to pay, and reducing the size of the state for those who need it most. Trump’s BBB is another example of his populist style not serving the people who voted for him.
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