TRUMP`S UNAFFORDABLE MIDTERM STIMULUS / PROJECT SYNDICATE

Trump’s Unaffordable Midterm Stimulus

A new report from the Congressional Budget Office shows that the US fiscal outlook has deteriorated sharply since Donald Trump returned to the White house last year. But rather than addressing America's shaky public finances, Trump is courting disaster by devising ways to juice the economy before November's midterm elections.

Desmond Lachman

WASHINGTON, DC – Emerging-market policymakers are notorious for ignoring economic vulnerabilities during good times, thereby setting the stage for periodic bond- and currency-market crises when boom turns to bust. 

President Donald Trump’s efforts to stimulate the US economy ahead of November’s midterm elections – America’s fiscal health be damned – reflect a similar short-sightedness. 

The difference is that an emerging market-style crisis in the US would reverberate worldwide.

While Trump appears to be in denial about the poor state of US public finances, the latest report from the non-partisan Congressional Budget Office, released last month, shows that the fiscal outlook has deteriorated since Trump returned to the White House last year. 

The CBO’s projected deficit for 2026 has increased by some $100 billion (or 8%) over its January 2025 forecast, and the cumulative deficit over the 2026-35 period is now $1.4 trillion (or 6%) higher. 

This means that the US budget deficit will amount to $1.9 trillion this year and rise to a jaw-dropping $3.1 trillion – 6.7% of GDP – in a decade.

The US budget deficit is thus on track to average around 6% of GDP over the next ten years – double the level (around 3% of GDP) widely considered to be consistent with public-debt stability. 

This would take the public-debt-to-GDP ratio from its present 100% to 108% by 2030 and to an unprecedented 120% by 2036. 

The CBO also warns that the balances of two major trust funds – the Highway Trust Fund and Social Security’s Old-Age and Survivors Insurance Trust Fund – will be exhausted within just a few years (in 2028 and 2032, respectively).

But far from addressing America’s compromised public finances, Trump continues to make matters worse. 

Beyond calling for a $500 billion increase in the defense budget over the next two years, he is devising ways to juice the economy before November, in the hopes of winning back voters who are increasingly unhappy with his handling of economic issues like affordability. 

It does not help that the one area where the Trump administration has cut spending sharply is programs on which Americans depend, like health care.

Trump hopes that coming tax refunds linked to the One Big Beautiful Bill Act that he signed into law last year will mollify voters, apparently unconcerned that the OBBBA will add over $3 trillion to the budget deficit over the next decade. 

All that matters is maintaining control of Congress, which Trump evidently believes requires – together with new voting restrictions – making Americans feel richer just long enough to cast their votes for his GOP minions.

That was the point of the $2,000 tariff “dividend” checks that Trump promised to provide to most American households last November. 

While that pledge stalled, Trump may have been considering sending the payments – or making fresh promises that they were on their way – in the run-up to the vote. 

The Supreme Court’s ruling that Trump’s use of emergency powers to impose his “reciprocal” tariffs exceeded his authority throws a wrench in this plan – and threatens to expand the deficit yet further, especially if the Trump administration is ordered to issue tariff refunds. 

The Committee for a Responsible Federal Budget estimates that the ruling could add around $2 trillion to US public debt over the next decade.

The projected increase in the debt ratio calls attention to what long set the US apart from other countries, not least emerging-market economies: strong international demand for its bonds. 

Today, foreign central banks, pension funds, and private investors own $8.5 trillion worth of US Treasury bonds, about 30% of the total. 

At a time when the US is running an annual budget deficit of nearly $2 trillion and has $9 trillion of maturing bonds to roll over this year, maintaining these investors’ confidence in America’s creditworthiness is essential. 

Yet Trump is actively undermining it.

From Trump’s attacks on the Federal Reserve’s independence (which raise fears that the US will try to inflate away its debts) to his aggressive foreign policy, denigration of allies, and weaponization of finance, the list of confidence-destroying episodes is long. 

Trump’s periodic musings about taxing Treasury interest payments on bondholders in countries that “unfairly” tax US companies only make matters worse.

Trump seems largely unperturbed by signals of declining investor confidence, including a weakening dollar and record-high gold prices. 

But his warnings of “big retaliation” if Europe sold off Treasury bonds in response to his threats to annex Greenland – threats from which he soon backed off – suggest that he is aware of the vulnerability that growing US indebtedness represents.

Nonetheless, Trump continues to pursue the kinds of misguided economic policies one typically sees in emerging-market economies – the type that worsen the long-term economic outlook and make a bond-market crisis more likely. 

For example, his chaotic and aggressive import-tariff policy has increased economic uncertainty and limited the comparative-advantage benefits derived from international trade, and his overly aggressive immigration policy risks creating worker shortages, especially for skilled labor.

Likewise, Trump’s cuts to funding for higher education and research will erode the foundations of America’s technological leadership.

And his industrial policies, including the acquisition of a 10% stake in Intel and claim of a 15% cut of Nvidia’s chip sales to China, are bound to distort decision-making by investors. 

All of this will impede America’s ability to maximize the benefits of the AI revolution.

A hoary quip among Wall Street traders is that the longest river in emerging-market economies is “de-nial.” 

A major branch of it now runs through the US, bearing the risk of bond- and dollar-market disasters. 

Given that the US still constitutes around 25% of world GDP, Trump is placing the global economy at risk.

Desmond Lachman, a senior fellow at the American Enterprise Institute, is a former deputy director of the International Monetary Fund’s Policy Development and Review Department and a former chief emerging-market economic strategist at Salomon Smith Barney.