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Your guide to what Trump’s second term means for Washington, business and the world
Rich nations are turning on the fiscal taps. On Friday, Donald Trump is set to finally sign his “big, beautiful bill” into law. The tax-cutting legislation is estimated to add more than $3tn to the US deficit over the next decade. On Thursday in Japan — where public debt is over two and half times the size of its economy — parties kicked off campaigns for upper house elections promising cash handouts and cuts to sales taxes. And just a few weeks ago Nato members — with the exception of Spain — agreed to raise investments in defence from 2 per cent of GDP to 5 per cent by 2035. The large debt piles already built up in the Covid pandemic no longer seem to matter.
While the defence spending is necessary, the fiscal largesse is storing up trouble. New borrowing is taking place at elevated interest rates. Economic growth, which would erode the debt burden, is hampered by trade wars and global uncertainty. Ageing populations are set to crimp future productivity growth, and will add to pension and healthcare bills. Many advanced economies will need to shrink their deficits to get rising debt trajectories credibly under control. But quite a few are going in the opposite direction.
Politicians seem unable to make the necessary cutbacks. In the US, the so-called Department of Government Efficiency — a reasonable idea, so far poorly executed — has made nowhere near its goal of $2tn a year in savings. Trump’s bill cuts health insurance support for the poor but future administrations will find this difficult to maintain. In France, the government is seeking billions of euros in savings to cut its high deficit, yet the nation’s divided parliament has struggled to agree on where the cutbacks should land. In recent weeks, Britain’s Labour government has reversed £6.25bn in planned cuts to benefits following an uproar from voters and its own MPs.
Growth-enhancing measures could ease debt pressures by raising future tax revenues. Trump’s tax-cutting bill provides generous incentives for investment, but it also uses funds on what were campaign gimmicks, including tax cuts for the wealthy. Independent forecasters are sceptical that the bill will significantly lift long-term growth. The White House argues that tariffs will bring in revenue, but they will curb business activity too. Economists also reckon chunky new spending commitments by advanced economies on defence will do little to boost underlying growth rates, unless funds are channelled more into research and development.
Not all nations are in the same boat. After years of living frugally, Germany had the fiscal wriggle room to loosen its strictures on borrowing this year. Last month’s draft budget sensibly earmarked funds to fix the nation’s crumbling infrastructure, which should raise its growth potential. Still, a lot depends on how well building projects are executed. That is the concern around Britain’s recent expansion of public capital investment too.
The public debt-to-GDP ratio across all advanced economies is at around 110 per cent, and rising. Sooner or later governments will have to face the music. For now, it appears as though today’s leaders are hoping whoever follows them will do the hard work. In the interim, investors will demand higher premiums to lend to governments, particularly as central banks step back from buying government bonds. That means debt repayments will eat up an ever growing share of public firepower.
The easy part of governing is spending money. It is far harder to cut costs and design policies to raise growth. But it is the job of politicians to make difficult choices. Growing debt piles makes that even more imperative. If they don’t take the task seriously enough, then bond markets will.
