Last week, as House Republicans met behind closed doors in the Capitol to hammer out a tax cut plan, Rep. David Schweikert, an Arizona Republican, sounded the alarm.
Mr. Schweikert told his colleagues that America's fiscal problems were at risk of spiraling out of control. He warned that Wall Street investors are starting to think twice about lending to the United States, and that a loss of confidence in Washington's tax and spending plans could ripple through the economy.
“This is not a game,” Schweickert, a member of the House Ways and Means Committee, said in an interview. “We need to adjust both how we approach policy and how we communicate that policy.”
Schweikert's view, echoed by other lawmakers at the meeting, was an early sign of the tough economic and political challenges that the $36 trillion U.S. debt will pose to President Trump.
Concerns about rising interest rates and widening budget deficits have stalled Republican efforts to quickly pass Mr. Trump's policies into law. The impending return to debt limits has investors and rating agencies nervous about the fiscal outlook, with the risk of default roiling global financial markets.
“Markets are definitely more focused and concerned about the impact on U.S. finances and issuance and debt levels than they were 10 years ago,” said Nathan Sheets, chief economist at Citigroup and a former Treasury official. said.
Past presidents have faced dire fiscal prospects upon taking office. Health care and post-retirement costs have long been expected to skyrocket as the number of retirees exceeds the number of new employees.
But the situation has taken recent developments that alarm economists and investors.
The annual difference between government spending and revenue exceeded $1.9 trillion last year, or 6.6% of gross domestic product. This is a huge amount for a country that is neither at war nor on the brink of economic downturn. According to the nonpartisan Congressional Budget Office, it is far higher than the historical average of 3.8% of GDP over the past 50 years.
Investors are the ultimate arbiters of Washington's fiscal health. For decades, interest rates were low even as budget deficits widened, and borrowers were willing to buy bonds to help pay the government. But in recent years, investors have become more sensitive about buying new bonds, which could fall in value as interest rates rise.
That raises the possibility that Wall Street and global financial institutions will start demanding higher interest rates on the bonds the Treasury needs to issue to finance the budget deficit. The changes could spill over into higher costs for Americans borrowing to buy cars or homes, since the U.S. debt is the benchmark for other loans across the economy.
Trump's victory in November further accelerated these concerns. Bond yields rose in the face of a landslide Republican victory as investors prepared to buy new bonds to cover the roughly $5 trillion cost of extending the tax cuts Trump passed in 2017.
Analysts currently believe the costs of extending the 2017 tax cuts are priced into long-term interest rates, but further increases in deficit spending on additional tax cuts and spending programs could alarm markets and prompt selling. There is sex.
“If you start seeing headlines with big deficit numbers about what this settlement bill is going to do, you can expect a gradual deterioration in the situation,” said Blake Gwynne, head of U.S. rates strategy at RBC Capital Markets. “Maybe there will be a little panic.”
To avoid that, Republicans are exploring dozens of ways to reduce the cost of the bill. But so far, progress has been slow. Republicans are using a special legislative process called “reconciliation” to craft the bill, which allows them to bypass Democrats in the Senate. The first step in that process is to set an overall price tag for the law.
Republicans on the House Budget Committee have put together a 50-page document to cut spending and raise revenue, listing dozens of options, including imposing a work requirement on Medicaid and eliminating the tax deduction for mortgage interest. , according to a copy of the document seen by the Times.
But many of the options on the list could face opposition from other Republicans, and given the slim majority in the House, the party would need near unanimity to pass the bill. need to. The House budget includes estimates for tariff increases, such as a flat 10% tariff that would generate $1.9 trillion in revenue over 10 years.
Including the tariffs in the bill would allow Republicans to formally count the revenue they generate toward the cost of extending the 2017 tax cuts. But many Republicans are hesitant to rely on tariffs as a way to pay the government's bills, even if Mr. Trump intends to use them.
“I think tariffs could be short-term,” said Rep. Greg Murphy, R-North Carolina and a member of the Ways and Means Committee. “For example, if China is squeezing us, if they get their act together, tariffs will be eliminated. I think we need a reliable tax system that helps fund the government in the short and long term. Masu.”
Even without enacting tariffs, Republicans plan to point out that the revenue generated by Trump's executive actions will offset the cost of the tax cuts, regardless of whether CBO and the Joint Committee on Taxation include them in their cost estimates of the bill. .
“These revenues will give us credit for hundreds of billions or perhaps even trillions of dollars that are going to come in over time, depending on what the tariffs are, according to the CBO and the great joint tax scores. That's not something we should do,” said Congressman Jason. Smith, Republican of Missouri, Chairman of the House Ways and Means Committee. “But what we need to do as legislators is look at the complete fiscal health of the country.”
Some House Republicans have also begun considering the possibility of extending the 2017 tax cuts for a few years to reduce the cost of the bill, according to lawmakers participating in the deliberations. Republicans initially made many of the tax cuts temporary in order to keep the bill's core costs low.
The search for other revenue and spending cuts is in part because Republicans want to do more than temporarily extend the 2017 tax cuts. It also plans further tax cuts, such as exempting tips from income tax. The document detailing the bill's options also mentions lowering corporate tax to 15% from the current 21%.
A relatively small number of House Republicans in New York, New Jersey and California are also demanding an expansion of state and local tax credits (often referred to as SALT) in exchange for votes. But raising the $10,000 cap could be costly, and lawmakers in high-tax states believe raising it is vital to their political prospects.
“I don't accept the premise that everything we do has to be considered a cost,” said Republican Rep. Nick Larota of Long Island. “But as long as that's the case, that's not the most important variable to the saltiest Republicans.”
