This week, concerns arose among Republican Budget Hawks as the House approved a bill that aligns with President Trump’s agenda. Financial markets reacted with unease, particularly given the persistently high US deficit.
In the wake of the pandemic, the national debt has surged to about 120% of GDP, largely due to the government’s issuance of two trillion dollars in stimulus packages aimed at bolstering the economy.
However, Trump’s proposed spending cuts have generated pushback from moderate Republicans, raising questions about the trajectory of the national debt and the corresponding interest payments required.
The international market for US debt showed signs of instability after the bill’s passage.
In a troubling development, Moody’s, the last major agency to maintain a triple-A credit rating for US sovereign debt, downgraded its assessment to double-A last Friday. This followed the release of a cost analysis by the Tax Commission.
Moody’s forecasts that the debt could climb to about 9% of GDP by 2035, up from 6.4% anticipated for 2024, primarily driven by interest payments and public spending alongside “relatively low revenue generation.”
Both the Dow Jones Industrial Average and the Standard and Poor’s 500 Index reported losses of around 2% for the week.
“The markets are closely watching fiscal policy… The bill is now in the House and Senate. There are existing concerns about its ability to actually reduce the deficit,” stated Federal Reserve Governor Christopher Waller during an appearance on Fox Business Network. “We’ve seen a $2 trillion deficit in recent years. This isn’t sustainable. The market is looking for more financial prudence. They’re apprehensive,” he added.
The Congressional Budget Office (CBO) has yet to release the final cost estimate for the House bill, but initial figures suggest it could add to the existing $2.3 trillion deficit. The Committee for a Responsible Federal Budget estimated this might rise to around three trillion dollars.
After backing a version of the committee’s bill, Budget Hawks secured over $1.5 trillion in cuts across various sectors such as agriculture, education, energy, and commercial programs. According to the CBO, these cuts could affect food assistance for about three million individuals and health insurance for around nine million.
Meanwhile, the tax cuts embedded in the bill are projected to be twice the size of the budget reductions, with estimates suggesting they will total $3.8 trillion, possibly even exceeding $4 trillion over the coming decade.
Following the bill’s passage, GOP Budget Hawks expressed mixed reactions.
Chip Roy (R-Texas), along with Andrew Clyde (Georgia), Ralph Norman (South Carolina), and Josh Bretzin (Oklahoma), supported the bill but later conveyed via social media that they were still seeking additional financial restraint.
Norman characterized the decision-making process as differentiating between “perfect” and “good,” particularly after implementing accelerated work requirements for Medicaid. He remarked that progress is about advancing principles rather than achieving perfection.
Rep. Thomas Massey (R-Ky.) openly criticized the bill, labeling it a “ticking debt bomb.” He challenged the notion that tax cuts paired with increased spending could yield favorable outcomes, suggesting instead that the bill exemplified a dangerous trend.
Despite the market response, many in the financial and public policy arenas were not surprised by the Republicans’ focus on tax cuts over deficit reduction.
“The House Freedom Caucus is vocal about its discontent, but ultimately we’ve passed this with Trump’s backing, which risks further bloating our deficit,” noted historian Matt Carp from Princeton University, reflecting on the lobbying influence behind the bill.
Investor Axel Merck mentioned that the absence of significant reforms points to a lack of financial discipline moving forward.
Some analysts are left questioning if the bond market’s reaction is driven by “bond vigilantes,” or more reactive hedge funds responding to the increased debt situation.
Economist Stephanie Kelton argued that although the new deficit may seem large, it’s not unprecedented in the current policy landscape, especially when compared to the debts resulting from tax cuts since 2017.
“A lot of new initiatives are actually offset,” she remarked. “I often ask about the implications of deficits. Are they contributing to a stronger economy for most people? Can we enhance healthcare, education, and infrastructure?”
Merck emphasized that the challenges of the financial market might pale in comparison to disruptions in trade caused by Trump’s tariffs, which pose more immediate concerns.
Trump’s administration has proposed a 50% tariff on the European Union if trade negotiations don’t yield desired results, increasing the likelihood of 25% tariffs on Brussels and affecting iPhone production shifts.
“You really start to see the costly advantages that the US holds,” he stated, noting that this turmoil in global trade renders problems like unaddressed long-term budgets even more pressing in fiscal discussions.
