Trump's debt overhang: will it be different this time?

Key Markets report for Tuesday, July 8, 2025

On Friday, President Trump signed “One Big Beautiful Bill Act” (BBB) into law, a day after the Congress narrowly passed it. The bill makes his 2017 tax cuts permanent while also cutting spending on federal social programs, and funds a major expansion of border security and defense.

The Congressional Budget Office (CBO) projected that the bill would increase the federal deficit by $2.4 trillion to $3.9 trillion over the next decade, driven by $3.7 trillion to $4.5 trillion in tax cuts, only partially offset by $1.2 trillion to $1.5 trillion in spending cuts, primarily to Medicaid, food stamps, and clean energy programs.

Independent analyses, like those from the Tax Foundation and Penn Wharton, estimate that deficits might increase by $1.7 trillion to $3.2 trillion, even factoring in potential economic growth. Other analysts’ estimates go to as high as $4 trillion. Meanwhile, the White House has claimed that the bill will actually reduce deficits by $755 billion to $2 trillion, in part thanks to tariff revenues ($2.3 trillion to $3.3 trillion) and more optimistic projections of economic growth. Some of the rosiest projections assert that deficits could decline by up to $6.6 trillion over ten years, lowering the debt-to-GDP ratio to 94% by 2034 from a projected 117%.

Adding to the debt overhang

However, the fact that the BBB raises the Nation’s debt ceiling by an additional $5 trillion, doesn’t inspire confidence: it will push US national debt beyond $40 trillion. If the past behavior of the political class is any guidance, this contingency all but guarantees that the Federal debt will reach that limit, making the debt overhang significantly worse than it already is.

Excessive debt is the tar that’s suffocating the US economy and adding debt on top of more debt isn’t solving anything: it is only more can-kicking down the road. It averts a nearer-term crisis but guarantees a worse crisis farther ahead. At the moment, US national debt is about 6 times the size of the government’s tax revenues and about 100% of the nation’s GDP. The figure corresponds to about $230,000 per American family and over the next decade could balloon to 130% of GDP ($425,000 per family).

But the size of this debt overhang is only part of the problem. The cost of servicing it is another: at $882 billion, the annual interest payments now exceed even the gargantuan American defense budget. With interest rates rising, this burden will only get greater. Ultimately, the government will have two choices in dealing with the debt crisis: it will either have to implement savage austerity or it will have to resort to unrestrained “quantitative easing” (QE, also known as money printing). Experience suggests that it will do a little bit of austerity (just enough to claim fiscal responsibility) and a whole lot of QE.

The unknown unknowns

Those outcomes would normally be fairly easy to predict, but in Trump’s case, there are a few other, important factors to take into account. Trump does appear to be making a sharp turn away from the British free trade model toward the American System of political economy (explained in more detail in this article). That means that his government will seek to make large infrastructure investments and to boost industrial production at home. And although we haven’t heard much talk about annexing Canada and Greenland, I believe that Trump was, and remains, entirely serious about that (the BBB does foresee major investments into building an ice-breaker fleet to boost the US’s “arctic security”). For sure, one way of solving the problem of debt overhang is to bring new wealth into the economic system.

It remains to be seen whether this will prove realistic, but as with all things Trump, we should by now expect the unexpected. The passage of the BBB did boost Trump’s political standing, as he himself acknowledged: “I think I have more power now,” he said following the bill's passage. 'More gravitas, more power.' Could anyone dare predict how Trump will choose to wield that power?

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