Presidential promises: Donald Trump swiftly implements his budget agenda

The United States (US) Congress stayed up late last Thursday passing President Donald Trump’s signature new legislation, the “Big Beautiful Bill”, and on Friday Mr Trump signed it into law. The new Bill reworks taxes and expenditure and restructures the multi-trillion-dollar US federal Budget. While some of its implications are relatively minor implementations of Mr Trump’s campaign promises — for example, it cancels taxes on tips — some are far more wide-ranging. Most importantly, however, it continues the tax cuts that Mr Trump had put in place in his first term as President. The $4.5 trillion tax-cut giveaway over 10 years has partly been paid for by a reduction in the amount allotted to socialised health care for the poorest Americans, which will now be accompanied by a work requirement. Subsidies for renewable power and electric vehicles will also be cut, which has drawn the ire of Mr Trump’s erstwhile ally, Tesla Chief Executive Officer Elon Musk.

 

Mr Musk, and other critics of the Budget Bill, are concerned in particular about the risk of rising debt levels in the US. Mr Trump’s package will raise the deficit by $3.4 trillion over the next decade, according to the nonpartisan Congressional Budget Office (CBO). This means it is one of the most expensive single Bills in decades. The CBO further projects that, by 2050, the US debt-to-gross domestic product ratio will be 145 per cent. But this assumes a contraction in spending over this period. The US Treasury, which does not assume any such contraction, expects that debt will cross 200 per cent of gross domestic product by the middle of the century. The Yale Budget Lab splits the difference, saying that it will be 183 per cent, as distinct from 142 per cent in a business-as-usual scenario. The additional debt will not be rendered insignificant by enhanced growth, in other words — the CBO expects that only 4 basis points of additional growth a year will be earned by this Bill.

 

It is necessary, first, to acknowledge Mr Trump’s achievement. He has managed to get the fractious Republican Party, which includes a sizeable contingent of fiscal conservatives that have long revolted at higher deficits, to sign on to his Bill. This level of party management contrasts with the chaos in Congress that marked his Democratic predecessor’s term, as well as parts of Mr Trump’s first term. In general, the President’s first six months have been among the most impactful in the modern era. He has moved swiftly forward on his agenda, and successfully managed the other branches of government. Neither Congress nor the Supreme Court has been able to intervene in any substantive manner. His entire administration and the White House have been unified in pushing through his agenda — again, a very different experience from his first term. That said, the markets are rightly concerned about what this will do to long-term Treasury yields, which will spike upwards. In the past, higher spending and yields in the US have been associated with capital outflows from the emerging world, including India. That might be a problem. But it is even worse, in fact, if money does not flow to the US. It means that confidence in the world’s anchor economy might finally be eroding — which could have even more dangerous implications for global stability.