President Donald Trump, members of his administration, and Republican members of Congress talk a lot about reducing the federal deficit. Unfortunately, their words are empty of substance. What matters to the long-term fiscal and economic health of the nation is enacting legislation to reduce the deficit. But the Republican Party’s major legislative effort, a giant reconciliation bill, will increase the federal deficit over both the short term and well into the future.
In addition, some of Trump’s current executive actions will result in slower economic growth, modestly higher inflation, and put further upward pressure on interest rates. Very importantly, the fastest-rising expense for the federal government is servicing the existing federal debt. Today, the net federal debt is about 100% of GDP. This means that each 1% increase in borrowing costs by the federal government increases the federal deficit by 1% of GDP.
