By David Lawder and David Morgan
WASHINGTON (Reuters) – Donald Trump’s Republicans are vowing to accelerate next year as they take full control of the U.S. Congress, with little stopping them from delivering on the president-elect’s promises to cut taxes and reorder the global trade landscape.
But the $28 trillion Treasury market is shining a red warning light against excessively increasing the debt burden, which is already growing at a rate of $2 trillion per year.
What remains to be seen is whether these concerns will be enough to slow Republican lawmakers’ ambitions or prompt them to find offsetting savings on a tax-cutting agenda estimated to cost nearly $8 trillion over a decade.
Markets are betting that Trump’s tax cuts and tariffs will fuel inflation as investors demand higher yields on longer-term government bonds. The yield on the 10-year US Treasury bond has risen to 4.4%, an increase of about 75 basis points since the ‘Trump trades’ began to dominate Wall Street in late September.
This trend is driving higher interest rates on mortgages, auto loans and credit card debt, countering interest rate cuts from the Federal Reserve and potentially jeopardizing U.S. growth.
It also increases the cost of financing America’s deficits and consumes the federal budget. Interest on the government debt reached $1 trillion for the first time during the fiscal year ending September 30, making it the second-largest expense after the Social Security retirement program.
“In a strange way, the bond market is now poised to rule this country,” said Republican Rep. David Schweikert, who serves on the House tax- and trade-focused Ways and Means Committee.
The market signals mean there are no blank checks for Congress and that the tax cuts will have to be accompanied by spending cuts, he said in an interview. “It’s a hurdle in the funding of the U.S. government.”
Managing that hurdle will be Trump’s choice to lead the Treasury Department, hedge fund manager Scott Bessent. Bessent has argued that Trump’s economic agenda will unleash stronger economic growth, which will in turn boost revenues and boost market confidence. His appointment could also reduce the likelihood of tough tariffs.
The budget math is daunting. Trump has promised to extend the tax cuts he passed in 2017, during his first term in the White House, for individuals and small businesses that expire next year. According to tax experts, this will add $4 trillion to the current $36 trillion in the US. debts in 10 years.
That’s in addition to debt already projected by the Congressional Budget Office under current laws to grow by $22 trillion over the same period. Trump also promised voters generous new tax breaks, including ending taxes on Social Security, overtime and tips and restoring car loan deductions.
The bill is likely to be $7.75 trillion above the CBO baseline over 10 years, according to the Committee for a Responsible Federal Budget, a nonpartisan budget watchdog group.
GROW TURNOVER
Concerns about the bond market’s influence on Trump’s agenda are the exception rather than the rule among Republicans in Congress, who came out some two weeks after he won the Nov. 5 presidential election and his party took control of Congress. then be the rule.
Some fell back on the party’s longstanding view that tax cuts can pay for themselves with stronger growth — a line used to sell Trump’s original 2017 tax cuts. Budget forecasters, including the Joint Committee on Taxation, estimate that these cuts have increased deficits by more than $1 trillion over a decade.
An analysis of economic feedback on extending tax cuts by the Committee for a Responsible Federal Budget found that higher growth would offset only 1% to 14% of the revenues lost directly from the cuts, leaving most of it through loans should be financed.
Still, Republican Sen. Mike Rounds said he believed the stability and growth that will come from extending Trump’s tax cuts in 2017 will ease some concerns in the market.
“What we need to do is show them that we’re going to build an economy so that the ratio of the size of the economy to the debt changes positively in our favor,” Rounds said.
MUSKS CUTTING
Republican Budget Committee Chairman Jodey Arrington said that accelerating economic growth to more than 3% per year – it is already at that pace for the third quarter – would increase revenues by $3 trillion over ten years, but that additional cuts would be necessary.
Rising bond market yields were “a motivating factor to contain budget deficits,” he said.
Arrington and fellow Republican Rep. Joe Wilson said they were hopeful that the nongovernmental panel led by billionaire Tesla and SpaceX CEO Elon Musk and former presidential candidate Vivek Ramaswamy could find ways to cut the budget, including others’ mandatory expenditure” programs. then Social Security and the Medicare health insurance program for the elderly, which Trump has pledged to preserve.
“With Elon Musk, I think we have a real opportunity to actually identify waste and cut the things that can be cut,” Wilson said.
A key goal is repealing Democratic President Joe Biden’s clean energy subsidies, which the CBO estimates at nearly $800 billion over 10 years, and some $60 billion in funds to modernize the Internal Revenue Service , although that would increase deficits in the long run by reducing budget deficits. audits.
AGENDA UNCLEAR
Republicans will likely rely in the new year on budget procedures that bypass Senate rules, requiring 60 of the House’s 100 members to agree on most legislation to pass Trump’s tax agenda with a simple majority.
Republican Senator Mike Crapo, the new chairman of the Senate Finance Committee, said it was too early to determine what tax policies would be included in the original legislation, adding that there had been a “misinterpretation by the market of what Trump is doing or will do’.
“A lot of people say: what tax policy are you going to pursue?” Crapo said. “And the answer to that is: the ones we know are the right ones.”
BOND VIGILANTS
James Carville, former President Bill Clinton’s political strategist, famously said in 1993 that he wanted to be reincarnated as the bond market because “you can intimidate anyone.”
If Congress’s actions indicate too much of a rise in the deficit, some market analysts worry that excessive debt issuance will cause market indigestion, causing interest rates to rise sharply.
“You cannot rule out the risk that confidence in US economic policymaking will be lost, that the bond watchdogs will come out in full force and the pressures will increase significantly, and that the US and global economies could be seriously shaken,” says Mark Sobel , a spokesperson for the US economy. former U.S. Treasury Department official who is now the U.S. chairman of the Official Monetary and Financial Institutions Forum, a think tank.
Nathan Thooft, chief investment officer and senior portfolio manager of Manulife Investment Management, said Congress and the Trump administration are likely to adjust course based on market reactions.
“They will respond to incoming feedback as it comes,” Thooft said. “If the dollar gets too strong, they’ll probably back off a little bit. The stock markets are overreacting, they might back off a little bit. They care about these things.”
(Reporting by David Morgan and David Lawder, additional reporting by Davide Barbuscia, Writing by David Lawder; Editing by Scott Malone, Dan Burns and Paul Simao)
