The US national debt has hit a record high this year, with levels nearing the debt ceiling, which was set at $31.4 trillion last year. Could this situation worsen with Trump’s second term?
Historically, the US has seen a consistent rise in its debt-to-GDP ratio, increasing by 19 percentage points from 2017 to its current level of 123% of GDP. Total debt had increased by 38.7% in the span of just 7 years, estimated to be around US$35.46 trillion this year. This trend of relentless debt growth could pose structural issues, encumbering future government expenditure.
One year into Trump’s first term as president, the introduction of the Tax Cuts and Jobs Act (TCJA) in 2017 marked the start of a high-debt environment. The act implemented corporate tax rate cuts from 35% to 21% which allowed American firms to position themselves more competitively in the international market and raise cost-efficiency. However, the drawbacks of this are proving to be greater as there is an estimated reduction in revenue of US$1.47 trillion over a 10-year horizon. The main source of tax revenue was from tariffs on foreign goods, especially gained through the US-China trade war. However, questions were raised as to how much it could contribute towards the total debt burden. In 2019, the tariff tax revenue only covered around 1/750th of the national debt.
The wider effect has impacted capital markets as the decrease in US credit ratings from AAA to AA+ last year raised borrowing costs significantly. This move exhibited the lack of confidence that institutions and the market had in the government’s ability to service their debt. Another factor that could aggravate the cost of debt servicing is a high-interest rate environment. Potentially, higher interest rates could push interest expenses upwards, leading to heightened levels of government debt. The average interest rate from 2015- 2024 had risen from 2.35% to 3.32% and at the same time, the total value of debt increased from $24.08 trillion to $36.54 trillion.
Inflation will be a huge determinant of a high-interest rate environment. Inflation data earlier this month suggested that inflation is at 2.6% with core inflation still steady at 3.3%. Powell takes a cautious approach to this data, considering it alongside data on the resilience of the labour market. Whether we can expect a quarter-point decrease depends on the performance of the economy in this last quarter but most importantly Trump’s Trade policies. If Trump does implement tariffs, then firms could suffer from increased import costs, pushing cost inflationary pressures upwards. This could increase the prospect of higher-for-longer, which could harm debt levels in the long term.
Looking forward, Trump seeks to extend the TCJA and provide greater tax breaks, and incentives to businesses in strategic industries like energy and information technology, financials and defence. This would be implemented with the sole objective of boosting the international competitiveness of American firms in global markets against formidable rivals like China. In the long term, another key area of spending that could rise with Trump’s presidency is defence expenditure. US military spending in 2023 alone reached $916 billion, approximately 40% of global military spending. With a predicted rise in geopolitical tensions in Trump’s second term, the objective of this expenditure is to match the military powers and technologies of Russia and China, who have invested substantial amounts of money and time building up their military reserves.
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