Rising cost of paying off national debt poses risk to Trump's promises on growth and inflation

WASHINGTON — WASHINGTON (AP) Donald Trump has big plans for the economy and a big debt problem that will pose an obstacle to achieving them.

Trump has bold ideas for tax cuts, tariffs and other programs, but high interest rates and the price of paying down the federal government's existing debt could limit what he is in able to do.

Not only is the federal debt at about $36 trillion, but soaring inflation after the coronavirus pandemic has driven up government borrowing costs, so that debt service year next year will easily exceed national security spending.

The higher cost of servicing the debt gives Trump less wiggle room with the federal budget as he seeks to cut income taxes. It's also a policy challenge because rising interest rates have made it more expensive for many Americans to buy a home or a new automobile. And the issue of high costs helped Trump win back the presidency in the November election.

“It's clear that the current amount of debt is putting upward pressure on interest rates, including mortgage rates for example,” said Shai Akabas, executive director of the economic policy program at the Bipartisan Policy Center. The cost of housing and groceries will increasingly be felt by households in a way that will harm our economic prospects in the future.

Akabas pointed out that debt servicing is already beginning to crowd out public spending on basic needs such as infrastructure and education. About one in five dollars spent by the government now goes to repaying investors for borrowed money, instead of enabling investments in future economic growth.

This is an issue on Trump's radar. In his statement on choosing billionaire investor Scott Bessent as Treasury secretary, the Republican president-elect said Bessent would help curb the unsustainable trajectory of the federal debt.

Debt servicing costs along with rising total debt are complicating Trump's efforts to renew his 2017 tax cuts, much of which will expire after next year. The increased debt resulting from these tax cuts could cause interest rates to rise, making debt servicing even more expensive and minimizing the benefits that tax cuts could produce for growth.

Clearly, it's irresponsible to roll back the same tax cuts when the deficit has tripled, said Brian Riedl, a senior fellow at the Manhattan Institute and a former Republican congressional aide. Even congressional Republicans, behind the scenes, are looking for ways to curtail the president's ambitions.

Democrats and many economists say Trump's income tax cuts disproportionately benefit the wealthy, depriving the government of revenue needed for programs benefiting the middle class and the poor.

“The president-elect's tax policy ideas will increase the deficit because they will reduce taxes on those with the greatest ability to pay, like the corporations whose tax rate he has proposed reducing even further to 15 percent,” he said. said Jessica Fulton, vice president of policy. at the Joint Center for Political and Economic Studies, a Washington-based think tank that addresses issues facing communities of color.

Trump's team insists he can make the math work.

The American people re-elected President Trump with a large majority, giving him a mandate to implement the promises he made on the campaign trail, including lowering prices. He will succeed, said Karoline Leavitt, a spokeswoman for the Trump transition.

When Trump was last in the White House in 2020, the federal government was spending $345 billion a year to service the national debt. It was possible to increase the national debt through tax cuts and pandemic aid because the average interest rate was low, so repayment costs were manageable even though debt levels were low. debt was increasing.

Projections from the Congressional Budget Office indicate that debt service costs could exceed $1 trillion next year. This is more than the planned defense spending. The total is also higher than non-military spending on infrastructure, food aid and other programs directed by Congress.

What has fueled the increase in debt servicing costs is rising interest rates. In April 2020, as the government borrowed billions of dollars to fight the pandemic, the yield on the 10-year Treasury note fell to 0.6%. They now stand at 4.4%, having increased since September, as investors expect Trump to add several billion dollars to projected deficits through his income tax cuts.

Democratic President Joe Biden can point to strong economic growth and having managed to avoid a recession as the Federal Reserve sought to bring down inflation. Yet deficits reached unusually high levels during his tenure. This is due in part to his own initiatives to boost manufacturing and combat climate change, as well as the legacy of previous Trump tax cuts.

Those around Trump, as well as Republican lawmakers, are already looking for ways to cut government spending to minimize debt and lower interest rates. They attacked Biden over deficits and inflation, setting the stage for questions about whether they can persuade Trump to act.

Elon Musk and Vivek Ramaswamy, the wealthy businessmen leading Trump's efforts to cut government spending, have proposed that the new administration simply refuse to spend any of the money approved by Congress. It's an idea that Trump has also supported, but would likely draw challenges in court because it would weaken Congress' authority.

Russell Vought, White House budget director during Trump's first term and Trump's choice to lead it again, presented an alternative budget proposal for 2023 with more than $11 trillion in spending cuts over 10 years in order to potentially generate a surplus.

Michael Faulkender, a finance professor who worked in Trump's Treasury Department, told a congressional committee in March that all energy and environmental components of Biden's Inflation Reduction Act of 2022 should be repealed to reduce deficits.

Trump has also talked about imposing tariffs on imports to raise revenue and reduce deficits, while some Republican lawmakers such as House Budget Committee Chairman Jodey Arrington of Texas have discussed adding work requirements to reduce Medicaid spending.

The White House last faced pressure from high interest rates to tackle debt-servicing costs about three decades ago, early in the presidency of Democrat Bill Clinton. Higher yields on the 10-year Treasury bond led Clinton and Congress to reach an agreement on deficit reduction, ultimately producing a budget surplus beginning in 1998.

Clinton policy adviser James Carville joked at the time about how bond investors, by raising U.S. government borrowing rates, could humiliate the commander in chief.

I thought if there was reincarnation, I wanted to come back as president or pope or as a .400 baseball hitter,” Carville said. “But now I would like to come back as a bond marketer. You can intimidate everyone.

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