Background on the US Debt and Trump Tax Plan
The United States faces a growing concern over its mounting national debt, which investors fear will worsen once the comprehensive tax and spending bill, proposed by President Donald Trump, is approved by the Senate. This concern stems from the possibility that bond yields will remain elevated for an extended period, increasing borrowing costs for consumers, businesses, and governments.
Market Sensitivity to US Debt Profile
The global markets have shown sensitivity to the deteriorating US debt profile, further exacerbated by Moody’s downgrade of the United States’ sovereign credit rating on May 16. Long-term bonds have been affected by worries about the deficit, with investors offering a muted response to a 20-year bond auction and driving the 30-year bond yield to its highest level since October 2023.
Impact of Trump’s Tax Plan on US Debt
According to the Congressional Budget Office, Trump’s tax plan, as passed by the House of Representatives, is expected to add approximately $3.8 trillion to the federal government’s $36.2 trillion debt over the next decade.
Senate’s Role and Potential Changes
After being approved by the House last week, the tax bill now heads to the Senate, where members are expected to work on it following the Columbus Day recess. While some provisions of the bill are likely to be well-received by Republican voters, senators are expected to push for changes.
Christopher Hodge, Chief US Economist at Natixis: “The Senate will be less willing to include deep spending cuts, and the longer the debate drags on, the more likely it is that prices will rise.”
Trump’s Timeline and Risks
President Trump aims to have the final tax bill on his desk before July 4, but any delay increases the risk that weaker-than-expected economic data will make deep spending cuts even less popular among senators, according to Brian Nick, Director of Investments at NewEdge Wealth.
Investor Perspective
Despite concerns about the deficit, investors see growth potential from tax cuts and tariff revenues, which they weigh in their investment decisions.
Trump and his team: Have emphasized the $1.6 trillion in direct spending cuts when questioned about the fiscal tax law’s potential impact on the deficit.
Leading Republicans argue that tax cuts will pay for themselves through increased economic growth and an estimated $2.5 trillion in new revenues over a decade.
Key Questions and Answers
- What is the main concern of investors? Investors fear that bond yields will remain high for an extended period, increasing borrowing costs for consumers, businesses, and governments.
- How will Trump’s tax plan affect the US debt? The Congressional Budget Office estimates that Trump’s tax plan will add approximately $3.8 trillion to the federal government’s $36.2 trillion debt over the next decade.
- What changes are expected in the Senate? Senators are likely to push for modifications to the tax bill, potentially softening deep spending cuts.
- What are the risks if the tax bill is delayed? A delay increases the risk that weaker-than-expected economic data will make deep spending cuts less popular among senators.
- Why are investors optimistic about growth? Investors see potential for growth from tax cuts and tariff revenues, which they consider in their investment decisions.
