"Everyone has a plan... until they get punched in the face," former heavyweight champion Mike Tyson once said. By replacing the ring with the political scene, everyone has a plan to reduce the U.S. debt – until they accept the "punch" of the bond market.
Donald Trump's debt management plan is summed up as follows: drastic cuts in the public sector and programs like Medicaid and clean energy subsidies, which are not in line with his political priorities. On the revenue side, an extension of the tax exemptions of his first term, with the increased revenues from customs duties covering most of the difference. According to the logic of the infamous "Laffer Curve", tax breaks will stimulate the economy by increasing public revenues, even with reduced tax rates.
This is not a plan that finds universal acceptance. Many consider health care to be a basic right that should be extended, not restricted. Others want a sustainable environment for future generations. Nevertheless, Trump is showing energy and imagination in attempting to move from taxation to tariffs – a two-in-one solution that aspires to boost manufacturing, without draining the public purse.
However, at some point the unquenchable momentum of "Make America Great Again" meets the unshakable obstacle of deficit arithmetic. And then, someone has to back down. In 2024, Trump inherited a budget deficit of 6.4% of GDP, compared to an average of 3.8% over the past fifty years – a period that includes the 2008 financial crisis and the pandemic, among others. Even with the supposed savings from Elon Musk's so-called "Ministry of Government Efficiency" and tariff revenues, Bloomberg Economics forecasts show that this year's deficit is unlikely to fall below 6% of GDP.
Causes
In other words, Trump is moving the deficit index, but not enough. There are four main reasons why, with the current course, the US is heading towards a debt crisis.
First, the "One Big Beautiful Bill," passed by Congress, cuts taxes more than spending. To be expected, as tax breaks are popular, while spending cuts are not. If it goes to its current form, it will add about $2.4 trillion to the U.S. national debt over the next decade.
Second, despite his communications outbursts, Musk has only managed to cut spending $180 billion, well below the $2 trillion target. Dollars. And this is based on the claims of DOGE itself. Many identify accounting ambiguities, double-counting of cancelled contracts and possible future costs from dismissed civil servants who appeal to the Courts. The actual savings may prove to be much smaller.
Third, even if tariffs are maintained at current levels – a big "if" – they will generate about $2.5 trillion over the next decade. This roughly covers the cost of the Big Beautiful Bill, but it does not substantially reduce the deficit.
Because; Trump increased import tariffs to an average of 13%, and in 2023 the U.S. imported $3.3 trillion worth of goods. Tariff revenues should exceed $4 trillion. dollars. But the logic of the Laffer curve also applies to tariffs: the more expensive the imports, the more the market turns to domestic products.
Fourth, the bond market has begun to throw its own punches. A popular theory among Democratic analysts is that the erosion of trust in traditional media has left "low-informed" voters exposed to distorted realities. Markets, however, do not live in "information bubbles" – and they do not like what they see.
In May, Moody's downgraded its U.S. credit rating, trailing S&P and Fitch. The rating was downgraded from Aaa to Aa1 – a downgrade with symbolic and substantial significance. Although there was no panic, there was a partial "buyers' strike", with 30-year bonds temporarily exceeding 5% in yield.
Higher yields reflect the relentless law of supply and demand: the increased deficit requires more debt issuance, therefore more supply. But demand from countries such as China and Saudi Arabia has been limited. Therefore, the U.S. Treasury will have to pay a higher interest rate, increasing the deficit even further. In 2021, debt interest was equivalent to 1.5% of GDP; by 2034, it may reach 6%.
Solutions
Party rigidity prevents meaningful solutions. Republicans reject tax increases; Democrats reject cuts to Social Security, Medicare, and Medicaid. Without increased revenues or reduced spending, there is no way to substantially reduce debt. From 98% of GDP in 2024, it is projected to reach 126% in 2034 – or in other words, a mortgage of $155,000 per American citizen.
What can be done? Firstly, an increase in taxes. In the 1970s, the top rate was over 70 percent and growth was 3.2 percent. Today, the maximum rate is 37% and growth is only 2.5%. Fears that taxes are killing growth are exaggerated.
Secondly, a reduction in expenditure. Welfare programs do not need to be abolished. Targeted benefits and a gradual increase in the retirement age can reduce costs. At the same time, the "America First" policy gives room for cuts to the defense budget of up to $1 trillion.
Rendering – Editing: George D. Pavlopoulos
