After much debate, U.S. House Republicans have reached a deal on Donald Trump’s trillion-dollar legislative plan to reduce taxes. On Tuesday, the U.S. president urged his party to approve his "big and beautiful bill" during a rare visit to the U.S. Capitol. Now awaiting approval from the House. If passed, it will continue to the Senate. Members should think twice before doing it. Trump has only partially correctly obtained the bill's brand. Indeed, this is huge. It could boost U.S. debt by more than 3.3tn over the next decade. In its current form, however, the risk of economic consequences is ugly than the president portrays.
Worrying that the growing debt pile in the United States is ahead of Trump's second term. However, his administration’s instability towards policy making has raised further alarm. Last week, Moody downgraded the U.S. from its top three sovereign credit rating, becoming the last of the three major credit rating agencies. This has driven our long-term borrowing costs to be higher. The White House’s tariff cessation agenda in recent months has also raised questions about the state of safe haven for U.S. assets, which has increased pressure on fiscal yields.
Trump's fiscal plan adds to the insult to harm. According to the federal committee's forecast, the bill will increase the U.S. debt-to-GDP ratio by about 25 percentage points, a record 125% by the end of 2034. The annual deficit as economic share is expected to rise from 6.4% to 6.9%. As concerns about the sustainability of U.S. debt grow, this increases the risk of growing higher U.S. borrowing costs.
The packaging offers some of the president’s key campaign commitments. It expanded the tax cuts passed in his first term, while cutting tips and overtime pay. Spends are spent on defense and border security. Elsewhere, the bill is more generous and can increase the child tax credit and standard income tax deductions. Investment incentives for manufacturing facilities are also stronger than expected. The Republicans put the Sunset clause on some huge clauses to make it look more palatable. But many tax cuts will be difficult to revoke.
Any booster for homes and companies will be curbed by the blow efforts of the bill to offset spending. For example, there are significant cuts in Medicaid rights, which could leave millions of vulnerable Americans without health insurance. According to Penn Wharton's budget model, the bill maximizes the highest income rate for earners, and by 2026, the lowest 40% is even worse. The reduction of green tax credits under the Inflation Reduction Act also reduces overall corporate income.
Overall, the bill is expected to increase U.S. GDP by only 0.5% over the next decade. The White House believes forecasters ignore the impact of their broader policy agenda. This may be fair. Despite uncertain tariff rates, customs revenue can help fund additional expenditures. That being said, the economic growth hit on Trump’s import tariffs will far offset the growth of his fiscal parcel, according to Goldman Sachs. Higher growth rates are crucial to bringing the U.S. debt trajectory to a more sustainable basis.
The passage of the bill is not guaranteed. Republicans have only narrow majority in the House and Senate, and Trump’s agenda creates a split between the Fiscal Eagles and those who focus on cutting the impact on poor voters. It may evolve. But in the end, the bond market will have the final say. Investor responses would not be beautiful without serious attempts to control our spending.