Republican budget hawks got steamrolled this week as the House passed a bill to advance President Trump’s agenda, sending concerns though financial markets about permanently higher U.S. deficit levels.
Following the pandemic, the U.S. national debt ratcheted up to a new plateau of around 120 percent of gross domestic product (GDP) after the government sent out trillions in stimulus to bolster the economy — an amount that contributed to inflation and drew Republican outrage.
But spending reductions in Trump’s “big, beautiful bill” lost out to pressures from the moderate Republican caucus and the president, resetting expectations for the path of the national debt and the interest payments that will be needed to pay for it.
The international market for U.S. debt has wobbled in the aftermath of the House passage of the bill, with the yield on the 20-year and 30-year bonds spiking above 5.1 percent on Thursday
The bill has made the financial world woozy. Credit rating agency Moody’s, the last major credit rater to preserve triple-A status for U.S. sovereign debt, dropped its rating down to double-A last Friday after the Joint Committee on Taxation (JCT) put out cost estimates for the tax portion of the bill.
Moody’s sees U.S. debt reaching about 9 percent of GDP by 2035, up from 6.4 percent in 2024, mainly as a result of interest payments, spending on public programs, and “relatively low revenue generation.”
The Dow Jones Industrial Average and the Standard and Poor’s 500 index have both lost around 2 percent of their value on the week.
“The markets are watching the fiscal policy … the bill being put through the House and the Senate, and they have some concerns about whether it’s going to be reducing the deficit,” Federal Reserve Governor Christopher Waller said Thursday on Fox Business Network’s “Mornings with Maria.”
“We ran $2 trillion deficits the last few years. This is just not sustainable. And so the markets are looking for a little more fiscal discipline. They’re concerned,” Waller continued.
Final cost estimates for the House bill haven’t been released yet by the Congressional Budget Office (CBO), but initial estimates suggest the bill will add in the ballpark of $2.3 trillion to the deficit. The non-profit Committee for a Responsible Federal Budget put the number just above $3 trillion.
After voting down a version of the bill in committee, budget hawks managed to secure more than $1.5 trillion in cuts across the agriculture, education, and energy and commerce programs. Those will take away food stamps from about 3 million people and health insurance from about 9 million people, according to the CBO.
But the tax cuts in the bill, which are far larger for very high earners than they are for the rest of the population, are around twice the size of the budget cuts. Through the next nine years, they total $3.8 trillion and are likely more than $4 trillion through the next decade.
GOP budget hawks have sounded some conciliatory notes in the aftermath of the bill’s passage through the House.
Rep. Chip Roy (R-Texas), who along with Reps. Andrew Clyde (Ga.), Ralph Norman (R-S.C.) and Josh Brecheen (Okla.) voted the bill down in committee before allowing it to proceed, responded with an “Amen” to a social media post about the bill’s lack of fiscal restraint.
“We made it better, but it needs more fiscal restraint,” he wrote on Thursday.
Norman distinguished between “the perfect” and “the good” after he voted in favor of the bill following the addition of accelerated work requirements for Medicaid — a health care budget cut.
“Leadership isn’t about making the perfect the enemy of the good, but it’s about moving the ball forward without selling out your principles,” Norman said in a post on social media.
Rep. Thomas Massie (R-Ky.), who voted against the bill, had no qualms about calling it a “ticking debt bomb.”
“I’d love to stand here and tell the American people, ‘We can cut your taxes and increase spending and everything will be fine.’ But I can’t because I’m here to deliver a dose of reality about the ticking debt bomb known as the ‘Big Beautiful Bill,’” he wrote online.
Despite the market reaction this week, Republican prioritization of tax cuts over debt reduction is coming as little surprise to many in the worlds of finance and public policy.
“The House Freedom Caucus will yell and cry and probably get dragged … by Trump into signing onto this, and essentially we’re going to explode the deficit even further,” Princeton University historian Matt Karp said back in April, foretelling the lobbying blitz by President Trump this week that ultimately got the bill over the line.
Investor Axel Merk told The Hill that “it wasn’t a shock that there’s no entitlement reform in there, that there’s no substantial fiscal discipline in there.”
Some commentators have wondered whether the reaction in the bond market isn’t actually being caused by punitively-minded bond traders — know in the finance world as “bond vigilantes” — but by hedge funds with large amounts of debt that make them especially sensitive to yield volatility.
Economist Stephanie Kelton told The Hill said the new deficit expansion in the bill, as opposed to debt resulting from the tax cuts that have been in place since 2017, isn’t that large in the context of recent policy
“A lot of the new stuff actually is offset,” she said. “The question I always ask about deficits is — deficits for whom and for what? Are those deficits helping us to build an economy that works better for the majority of people? Do we get better healthcare, education, infrastructure? Or is it just tax cuts that provide that financial windfall for people who are doing phenomenally well?”
Much more significant than the deficit additions for financial markets, Merk told The Hill, is the disruption to trade flows caused by President Trump’s tariffs, which he threatened to expand on Friday.
Trump floated a 50-percent tariff on the European Union as trade negotiations proceed with Brussels and 25-percent tariffs on Apple if they don’t move iPhone production to the U.S.
“You are seriously jeopardizing the exorbitant privilege that the U.S. has,” he said. “Now that we have this wrench in global trade, things like a budget that on the fiscal side doesn’t address the long term issues is more relevant.”
