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President Donald Trump’s “big, beautiful” tax bill risks sharply increasing the US public debt, sparking alarm among investors and fuelling questions over how long the world will finance Washington’s largesse.
US long-term borrowing costs rose at the start of this week, after a congressional committee on Sunday advanced a budget bill that is estimated to add trillions of dollars to the federal deficit over the next decade by extending tax cuts. The bill progressed after Moody’s on Friday stripped the US of its pristine triple-A credit rating.
The bill and credit downgrade have added to anxiety over the sustainability of US public finances at a time when many investors and analysts say the debt and deficit are at uncomfortably high levels.
“It’s like being on a boat heading for the rocks and having those running the ship arguing over which way to turn,” Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, told the Financial Times.
He added: “I don’t care whether they turn left or right as much as I care that they turn to get the ship back on course.”
The proposed legislation, which Trump has repeatedly dubbed as “The Big, Beautiful Bill”, would extend sweeping tax cuts passed in 2017 during the president’s first term.
It would also make big reductions to the Medicaid insurance scheme for low-income individuals and to a food aid programme. Hardline Republicans are pushing for greater spending cuts.
Karoline Leavitt, White House press secretary, on Monday said the bill “does not add to the deficit”, echoing other Trump administration officials who have suggested the tax cuts would accelerate economic growth.
But, the non-partisan Committee for a Responsible Federal Budget estimates the legislation would increase the public debt by at least $3.3tn through to the end of 2034. It would also increase the debt-to-GDP ratio from 100 per cent today to a record 125 per cent, the group said. That would exceed the rise to 117 per cent projected over that period under current law.
Meanwhile, annual deficits would rise to 6.9 per cent of GDP from about 6.4 per cent in 2024.
The surge in public debt would need to be financed by investors, with the Treasury department accelerating its sales of bonds. However, there are signs that debt investors will insist on higher yields to buy the debt, increasing borrowing costs.
The 30-year Treasury yield on Monday rose to a peak of 5.04 per cent, its highest level since 2023 after the House Budget Committee advanced the legislation and on the heels of Friday’s Moody’s ratings cut.
“We’re at an inflection point in the Treasury market where in order for Treasuries to stay at these current levels, we need some good news on the deficit, soon,” said Tim Magnusson, chief investment officer at Garda Capital Partners. “The bond market is going to be the disciplinarian if there needs to be one.”
Edward Yardeni, president of Yardeni Research, reprised a term he coined in the 1980s to describe a market backlash to fiscal looseness: “The bond vigilantes have saddled up, they are ready to make their move,” he said.
Dalio said the US needed to rapidly cut its deficit to 3 per cent of GDP by some mix of reducing spending, raising revenues and lowering real borrowing costs.
Bill Campbell, portfolio manager at investment group DoubleLine, noted that it was “underweight” 20- and 30-year Treasuries. “It doesn’t look like there is a serious effort to rein the debt in,” he said.
The US has long been able to run big deficits compared to other countries because of the vast global appetite for Treasuries, as the world’s de facto reserve asset, and the dollar.
This has given the US significant flexibility in its public finances, in the view of rating agencies. But the latest challenge comes at a time when fiscal worries and angst over Trump’s tariffs make investors more concerned about their exposure to dollar assets.
“The key problem is that the market has over the past two months structurally reassessed its willingness to fund US twin deficits,” said Deutsche Bank’s George Saravelos.
The combination of “diminished appetite to buy US assets and the rigidity of a US fiscal process that locks in very high deficits is what is making the market very nervous”, he said.
Additional reporting by Steff Chávez