What will be the consequences of Donald Trump’s "One Big Beautiful Bill"?
The US president’s "One Big Beautiful Bill", an extraordinary mix of tax cuts and spending plans, has made it through both houses of the US Congress. What will be the consequences?
What’s in Trump's "Big Beautiful Bill"?
The “One Big Beautiful Bill” – narrowly passed by both houses of Congress – is an “omnibus” bill incorporating a vast array of tax and spending plans, some of which will require further legislation.
The most important move is to make permanent the hefty tax cuts of Donald Trump’s first term that were set to expire at the end of 2025 – this will cost the federal government $4.6 trillion over ten years. There are also some new tax cuts, including tax breaks on tips and overtime pay, but only until 2028.
On the spending side, the bill boosts spending on defence and immigration enforcement, and slashes more than $1 trillion in federal spending on social and medical programmes and clean-energy credits. The Congressional Budget Office (CBO) watchdog estimates 11.8 million Americans could lose health insurance by 2034 due to the changes.
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Is Trump's "One Big Beautiful Bill" a sensible package?
Not remotely, says The Economist. It’s a “showcase for fiscal incontinence and ideological exhaustion”, which will attach “to a body of government-shrinking Reaganism an appendage of populist Trumpism”. It is also disfigured by carve-outs and pork-barrel incentives granted to individual lawmakers in the scramble to get it through Congress – and its effects will “menace” the US economy for a decade.
The package doesn’t make sense politically or economically, agrees Gabriel Rubin on Breakingviews. Politically, it’s likely to prove the “most Pyrrhic of victories” as its damaging effects on Trump’s rank-and-file supporters become clear.
What about economically?
Trump’s attitude towards clean energy, tech and the bill’s wholesale retreat from swathes of advanced manufacturing and energy technology will have the Chinese rubbing their hands with glee and their eyes with disbelief, says Ambrose Evans-Pritchard in The Telegraph. The US has abandoned a central front of the Sino-American struggle without a fight, and “has just dropped a big, beautiful, bunker-busting bomb on its own economy”. Rapidly phasing out support for nascent solar and wind industries threatens to “accelerate the effects of climate change, slow job creation and thwart the ascent of power-hungry artificial intelligence”, agrees Rubin. And other spending cuts look misconceived – a dollar in Medicaid spending, for example, leads to more than a dollar’s worth of economic activity. Even more worrying is that the lust for lower taxes will “mortgage the country’s future by teeing up a fiscal disaster”. Trump’s “big, beautiful bill… will get ugly, fast”.
What’s the fiscal impact of Trump's "One Big Beautiful Bill"?
The CBO estimates the package will raise federal deficits by $3.4 trillion over a decade (that’s over and above the existing annual deficits of about $2 trillion). That’s spooked many economists, especially given the US dollar has already fallen 10% this year on fears over long-term fiscal and economic stability.
Currently, the US debt pile is roughly $36 trillion, or 125% of GDP – not far off the 146% seen in Greece at the height of the eurozone debt crisis. Since 2010, the US national debt has ballooned from $13 trillion (or 90% of GDP) in 2010. And on current tax and spending trends, it is projected to hit about $60 trillion by 2035.
According to calculations by Ray Dalio, founder of hedge fund Bridgewater Associates, the Trump package will increase the US national debt from about $230,000 per American family to $425,000 per family. If steps aren’t taken to change this trajectory, says Dalio, “big, painful disruptions will likely occur”.
Haven’t we heard this before?
Fiscal hawks have been “predicting a debt-driven financial blow-up” in the US for decades, says John Cassidy in The New Yorker. It hasn’t happened. The underlying strength of the US economy, the global appeal of dollar-denominated assets, and the “belief that, in a pinch, Congress would react responsibly have staved off catastrophe”. But “nobody can predict how long this safety net will hold”. If Trump persists with his attacks on the US central bank, the Federal Reserve – and especially if he succeeds in replacing its boss, Jerome Powell, with someone more agreeable to big, inflationary interest-rate cuts – there would be a real risk of a “Turkey-style outcome, in which the markets lose faith in a highly indebted government led by an autocratic right-wing populist, with dire consequences for stocks, bonds, the currency and the economy at large”.
Are things really that serious?
Yes. Goldman Sachs calculates that, if Congress postpones fiscal tightening for another decade, the US might need to cut spending or raise taxes by an annual 5.5% of GDP to stabilise the debt-to-GDP ratio.
What Trumpites appear to be hoping, says Kenneth Rogoff in the Financial Times, is that a sustained return to ultra-low real interest rates will ultimately save the day. “But should the US, which aims to be global hegemon for another century or more, be betting the farm on this?” Clearly not. Over the past 15 years, US growth has been underwritten by historically low interest rates. But higher rates mean debt servicing costs will eat up an ever bigger slice of the budget, with all the risks that entails.
What risks are those?
At some point, the US will face a bond-market backlash, debt spiral and fiscal blow-up, says Gerard Baker in The Times. “Trump may yet get lucky and avoid his Liz Truss moment, but the spectre of the former prime minister’s fate awaits some American some day.” If the ballooning debt pile were accompanied by a serious and coordinated economic and industrial strategy, it might start to make sense, says Kyla Scanlon in The Free Press. Alas, of that there is no sign. While the US cuts taxes in the hope that will create new industry, China continues to directly invest in advanced manufacturing, critical minerals and industrial capacity. This deficit expansion without a purpose is a high-risk gamble. “The extraordinary cost will come due eventually, and America’s young people will be left to pay it.”
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