Mr. Trump has made bold promises on tax cuts and tariffs, but high interest rates and a budget allocated to paying down government debt could undermine his efforts.
Not only is the federal debt at approximately US$36 trillion, but the explosion of post-covid inflation has increased government borrowing to the point where debt service for 2025 will easily exceed spending dedicated to national security.
The higher cost of servicing the debt gives Mr. Trump less room to maneuver with the federal budget as he seeks to cut income taxes. It’s also a policy challenge, because high interest rates have made it harder for many Americans to buy a home or new automobile. It was, among other things, these concerns about the cost of living that helped the Republicans regain the presidency in the November election.
“It is clear that the current amount of debt is putting upward pressure on interest rates, including mortgage rates,” noted Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center. “The cost of housing and groceries will be felt more and more by households, in a way that will negatively affect the economic outlook in the future.”
Mr. Akabas pointed out that debt servicing is already beginning to undermine government spending on basic needs, such as infrastructure and education. About 1 in 5 dollars spent by government now goes to paying back borrowed money, instead of enabling investments in economic growth.
The unsustainable trajectory of debt
It’s an issue on Mr. Trump’s radar. In his statement on choosing billionaire investor Scott Bessent as Treasury secretary, the president-elect said Mr. Bessent would “help steer away from the unsustainable trajectory the federal debt is on.”
When Donald Trump left the White House in 2020, the federal government was spending US$345 billion a year servicing the debt. Projections from the US Congressional Budget Office indicate that debt servicing costs could exceed US$1 trillion next year. This is more than the planned defense spending. The total is also higher than nonmilitary spending on infrastructure, food aid and other programs under Congress.
Elon Musk and Vivek Ramaswamy, wealthy businessmen appointed by Mr. Trump to head a program to cut government spending, have proposed that the new administration simply refuse to spend any of the money approved by the Congress. It’s an idea that the president-elect has also supported, but one that would likely provoke challenges in court since it would undermine Congress’ authority.
The last time the White House was pushed to address debt-servicing costs for similar reasons was about three decades ago — early in the presidency of Democrat Bill Clinton. Mr. Clinton and Congress then reached an agreement on deficit reduction, which ultimately led to a budget surplus beginning in 1998.
Mr. Clinton’s policy adviser, James Carville, joked at the time about how bond investors pushing up U.S. government borrowing rates had more power than the head of state.
“I usually told myself that, if reincarnation exists, I wanted to come back as president, pope or baseball bat with an average of 400 points,” said Mr. Carville. Now I would like to reincarnate myself in the bond market. From there, we can intimidate everyone.”
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