From our Budget Breakdown series highlighting problems in fiscal policy to inform the 2025 tax and budget debate.
When Donald Trump began his second presidency earlier this week, he took the helm of a government running an annual budget deficit twice as big as the one Barack Obama left him eight years ago. Unfortunately, Trump and his Republican allies in Congress seem determined to expedite the breakdown of our country’s fiscal foundation by pursuing an extension and expansion of the budget-busting tax cuts they passed in his first term alongside irresponsible spending policies. To help inform the debate around these policies over the coming months, PPI’s Center for Funding America’s Future is launching Budget Breakdown, a new series that breaks down for our followers the many problems facing fiscal policymakers.
The latest budget and economic outlook published last week by the nonpartisan Congressional Budget Office (CBO) made clear the daunting fiscal challenges facing the new administration. This year, CBO projects the federal government will spend almost $1.9 trillion more than it raises in revenue. That deficit equals 6.2% of gross domestic product (GDP), which is twice the size of the federal budget deficit in Fiscal Year 2016.
The borrowing required to finance this deficit will bring our national debt to 100% of GDP, meaning that our government will owe lenders an amount equal to the total value of all goods and services produced by the U.S. economy in a single year. And the government will spend nearly $1 trillion just to pay interest on that debt — more than it spends on either national defense or Medicare. To further put this enormous cost in perspective: whether measured in dollars or as a percent of GDP, the federal government is now spending more money servicing our national debt than at any other point in American history.
Each of these already alarming figures will likely worsen if Trump and Congressional Republicans get their way. The GOP’s top priority is extending the expiring provisions of the Tax Cuts and Jobs Act they passed in 2017, which by itself could add up to $5 trillion to budget deficits over the next 10 years. But the new president also wants to cut taxes even further, such as by increasing the amount of state and local taxes that high-income households can deduct from their federal income taxes and exempting all tip income from federal taxation. At the same time, he has proposed to massively increase spending on immigration enforcement, national defense, and other conservative priorities. While the exact details of their ambitious legislative plans remain fluid, some House Republicans have estimated that the price tag for Trump’s full agenda could run as high as $10 trillion over the 10-year budget window.
Even if Republicans curtail their ambitions, it’s highly unlikely that they could fully offset the costs of whatever policies they do enact. Trump repeatedly ruled out any reforms to Social Security and Medicare, the two largest and fastest-growing federal programs, leaving just one-third of federal spending going to programs for which he has neither proposed to maintain or increase spending. When House Budget Committee Chairman Jodey Arrington circulated a preliminary menu of potential offsets totaling $5.7 trillion to his colleagues earlier this month, several members quickly concluded most of the options were politically unrealistic even though they conformed to Trump’s demands. It’s not hard to see why: to take just one example, 40% of the possible savings were from cuts to Medicaid — a popular program that provides health care to low-income Americans and represents less than 10% of federal spending.
Republicans had no qualms about increasing the deficit in Trump’s first term, during which the president enacted policies that increased budget deficits over CBO’s 10-year budget window by more than $8 trillion — nearly $5 trillion of which was unrelated to the COVID pandemic. But the consequences of more borrowing today are likely to be far worse than they were four years ago. Americans saw firsthand how trillions of dollars in deficit-financed spending during the Biden administration helped push prices and interest rates to their highest levels in decades. Further deficit spending could easily reignite inflation and hamper long-run growth by crowding out both public and private investment, sticking future workers with higher tax bills, and diminishing our fiscal reserve to address future crises. Already, CBO projects that rising debt would reduce incomes 30 years from now by up to $14,500 per person, in today’s dollars. If Trump and Congressional Republicans deficit-finance their agenda, they will further increase these costs for working Americans now and in the future.
