A big baleful bill
The Senate should vote down Donald Trump’s reckless tax cuts
If it does not, a collision with the bond markets awaits
Complacent about being the world’s haven, America has been budgeting without any sense of restraint.
Over the past year the federal government has borrowed a staggering $2trn, or 6.9% of GDP, even though no crisis has drained its coffers.
On May 16th Moody’s, a rating agency, stripped the country of its last headline triple-A credit score.
Yet on May 22nd the House of Representatives passed, by just one vote, President Donald Trump’s “big, beautiful” budget bill, which cuts taxes and raises deficits.
Reflecting the rising fiscal risk, the yield on 30-year Treasuries has risen to 5.1%, the highest since 2007, amid a sell-off
America has more fiscal leeway than other countries, but the Republican Party seems determined to test its limits.
Net federal debts have grown to 100% of GDP, a near-trebling over two decades, meaning that the Treasury will soon pay more than $1trn per year in debt interest, almost as much as it spends on health care for the old.
Politicians who should be debating how to tighten their belts are instead poised to raise borrowing still further.
Unless they think again, they risk stoking a crisis.
Some Republicans pretend that their budgeting is sound, but they are guilty of a sleight of hand.
The bill’s main effect is to take the temporary tax cuts from Mr Trump’s first term and make them permanent.
A continuation of the status quo, they argue, is not a new expense.
The bill also adds new tax cuts which, to keep down costs, will supposedly expire in 2028.
In other words, sunset clauses for new tax cuts seem to count as a saving, but stopping scheduled sunsets comes free.
To this fantasy, the bill adds cuts to clean-energy subsidies and Medicaid, health insurance mostly for the poor, to produce a slight fiscal tightening.
In reality the bill makes it more likely that America will exhaust its fiscal space.
Today’s official forecasts, which suggest that net debt interest could soon hit a record high as a share of GDP and then keep rising, are bleak—and they assume that the 2017 tax cuts expire and that deficits will narrow.
The new law would ensure that deficits stay around 6-7% of GDP, raising forecast debt in 2034 by about $3trn.
And if new temporary tax cuts become permanent, the cost could exceed $4trn.
These measures include tax exemptions for tips and overtime pay that were promised by Mr Trump during his election campaign.
Once enacted, they will be hard to get rid of, whatever the law says.
Republicans hope that two things will fill this giant hole.
One is tariff revenues.
This may be partly true, but their estimated proceeds range from $1.4trn-2.9trn over a decade.
Moreover, the figures include reciprocal duties that are on hold pending talks to reduce them, after their announcement caused a mini-run on dollar assets.
The other great Republican hope is economic growth.
Yet today’s bill is far less pro-growth than Mr Trump’s past tax reforms, which included a big permanent corporate-tax cut.
The tip and overtime exemptions are gimmicks.
The bill even includes a big increase in the deduction that high earners can claim on account of their state and local tax bills, which in effect subsidises lower levels of government to raise the taxes they levy.
When combined with Mr Trump’s tariffs, the overall effect on growth will be negative.
Moreover, whereas in 2017 a deficit increase arguably provided a helpful stimulus, there is less slack in the economy today, meaning that more spending is likely to be offset by higher interest rates.
Junkie debt
The belief that deficits will never matter is dangerous, especially as doubts mount over the country’s commitment to economic stability and low inflation under Mr Trump.
America needs lower spending and higher taxes to bring down borrowing.
When politicians do not face up to reality, the bond market eventually forces reality upon them—and that could prove sudden and painful.
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