Donald Trump will take office with ambitious ambitions to implement his 2017 tax cuts permanently, address the generational migration crisis, strengthen the American military to counter China’s rise, and restructure global trade through aggressive negotiations and taxes.
According to a Congressional Budget Office report released Friday, the second Trump administration will have to try to accomplish these goals against a backdrop of historically high budget deficits that are only expected to increase in the upcoming years. Such a platform would be challenging to implement even under the best of circumstances.
According to the CBO, the budget deficit in 2025 will reach a record $1.9 trillion, or 6.4% of GDP, which is more than it has ever been outside of a recession, epidemic, or war. From here, the deficit is only expected to increase, reaching $2.7 trillion by 2035.
Additionally, required expenditure on programs like Medicaid, Medicare, and Social Security is expected to increase more quickly than revenue, which will cause the total federal debt to skyrocket.
By 2029, Trump’s final year in office, the public’s portion of the federal debt BX:TMUBMUSD10Y will have surpassed the previous record of 106.1%, achieved in the final days of World War II. According to CBO projections, it will continue to increase to 118% of GDP by 2035.
This arrangement might have major political and economic repercussions for the incoming government.
“By any definition, we are on an unsustainable fiscal path,” stated Michael A. Peterson, CEO of the Peter G. Peterson Foundation, a group that supports a lower federal budget deficit.
In light of the Federal Reserve’s recent interest rate reduction, Peterson described the current pattern of rising interest rates as a “unusual dynamic” that signals “market concerns about future debt and inflation.”
Excessive government deficits, according to economists, were a contributing factor in the inflationary wave that followed the COVID outbreak and hindered President Joe Biden’s bid for a second term.
The Federal Reserve’s intentions to cut interest rates—a move that President-elect Trump has strongly backed—could be derailed by those same deficits.
Claudio Irigoyen, an economist at Bank of America, stated in a letter on Friday that he thinks the Fed will not be able to cut interest rates anytime soon due in part to huge budget deficits.
According to him, Trump’s suggested initiatives will simply make it harder to get lower interest rates.
He wrote, “There is significant uncertainty about the impact of Trumponomics 2.0 both in the U.S. and the rest of the world.” “Excessive fiscal stimulus,” such as Trump’s plans to spend upwards of $5 trillion to extend his 2017 tax cuts, will only add fuel to the inflation fire, while “protectionist policies” will fuel expectations for higher inflation.
Elevated federal deficits have the potential to deter investment from more productive private activity in order to finance government demands, which is another significant economic effect of the sea of red ink facing the new administration.
Growing deficits also run the risk of stifling private expenditure as investors purchase Treasury debt rather than using it for new projects, which is something the Trump administration will want to encourage in the energy production and rapidly growing AI sectors.
According to the CBO, domestic private investment declines by 33 cents for every dollar of the government deficit, and the consequences of lower private expenditure are expected to result in slower wage and economic growth.
Republican efforts to discover trillions in savings through the “Department of Government Efficiency” and changes to healthcare programs like Medicare and Medicaid are a result of their recognition of this reality. However, given Republicans’ historically slim three-vote majority in the House, even if these politically difficult cuts do come to pass, they are unlikely to accomplish anything beyond covering the costs of Trump’s proposed enormous tax cuts.
Irigoyen of Bank of America said that even under ideal circumstances, Trump and his congressional friends will reduce the deficit from its current level of over 6% of GDP to 4%.
Even though that would be “significant progress,” he continued, it’s uncertain how much it would help ease the financial strain of large deficits.
“A more plausible scenario is that the deficit doesn’t reduce at all in the next two fiscal years, with tax cuts, interest expenses and rising entitlement spending offsetting DOGE-recommended spending cuts and tariffs,” Irigoeyn stated. “Don’t hold your breath for fiscal consolidation.”
