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If there is any domestic risk in the US that could tip over into a full-blown crisis, it’s debt
There’s nothing Donald Trump loves more than a change of heart. Back in 2016, author and venture capitalist JD Vance called Trump “a total fraud” and “reprehensible”. He is now his vice president-elect.
As a backbench MP, David Lammy called him “a woman-hating, neo-Nazi-sympathising sociopath”. Now Trump offers the Foreign Secretary second helpings when they dine together in New York.
Does this mean the president-elect can have a change of heart himself? If so, let it be his attitude towards debt.
One of Trump’s major pledges on the campaign trail was to overhaul the size of the state. This is no longer a vague promise to “drain the swamp”. He plans to send the world’s richest man into the heart of Washington to start dismantling the Federal government.
Elon Musk has suggested he can trim a staggering $2 trillion (£1.6 trillion) off the Federal budget – almost a third of what will be spent this year. A Department of Government Efficiency will be created, while other departments will be significantly downsized, if not abolished completely.
For many Republicans, this is one of the most exciting aspects of Trump 2.0. It brings together different parts of Trump’s expanding coalition of voters: the idea appeals equally to those who would overhaul the DC “elites” and the Republican elites themselves, who have been warning for years about the dangers of allowing spending and debt to spiral out of control.
But will Trump really make good on it? Some obvious contradictions already stick out. Trump has promised not to touch the two entitlements that are on course to bankrupt America: social security and Medicare health benefits. Meanwhile, he has promised a wide variety of tax cuts, including, another big drop in corporation tax and possibly in capital gains tax, too.
These are moves that will make the US more competitive. They also widen the already gargantuan hole in the public finances and further raise the deficit.
This isn’t a prediction: it’s exactly what we saw in Trump’s first term. The Tax Cuts and Jobs Act went a long way to reducing the tax burden on workers and families.
But it did not, as was suggested at the time, pay for itself. In his first term, Trump was responsible for adding $8.4 trillion to the national debt – the majority of which was racked up before the pandemic.
This wasn’t a surprise, either. Trump was referring to himself as the “king of debt” even before he arrived in the Oval Office.
Might he now crown himself the “king of fiscal responsibility”?
It feels like a reach, especially as Trump has avoided getting specific when it comes to the spending side of the ledger. He talks about slashing the size of the state in the broadest terms, but also offers up both more tax cuts and further protections for current public spending. Musk can identify all the cuts he wants, but if these are the parameters in which he can make change, it’s going to be difficult to make a dent.
Perhaps the changes in circumstance will help him change his mind. The era of ultra-low interest rates is long gone – and is not likely to return in the next four years. Trump championed debt when that debt was cheap. But the government is now forced to spend over a trillion dollars a year just to service the money already spent.
That’s nearly a fifth of the federal budget that Musk can’t touch – nor is it money Trump can claim is going to support his wide voter base. No tax cut or giveaway is funded by that money.
Those payments only get bigger as the debt rises – a figure which already sits at almost 125pc of America’s GDP.
There is also the trillion-dollar deficit to think about. The more Trump fuels this, the more he risks inflation (not least if this is coupled with the wide-sweeping tariffs the president-elect has threatened to implement). Considering inflation is one of the biggest reasons Trump finds himself going back to the White House, to cause another price spike (even one much smaller than the post-lockdown surge) would almost certainly be held against him – even by his supporters.
The US was on an unsustainable spending track long before Trump – and it only looks likely to get worse. The country with the reserve currency can get away with uncontrolled spending longer than most. Trump isn’t at high risk of having his own mini-Budget moment. But if there is any domestic risk in the US that could tip over into a full-blown crisis in the next few decades, it’s not immigration, it’s not “woke”, it’s not energy security. It’s debt.
And this is possibly a once-in-a-generation moment to do something about it.
With Trump poised to re-enter Washington with both a Republican-led House of Representatives and Senate, real change can occur. Trump can set America up for financial success in the decades to come: a legacy that would age better than almost anything else he might do in office.
It wouldn’t be easy, but it would certainly be worth it. But has he really had that change of heart?