Will The ‘Beautiful' Bill Increase The Deficit?

Forbes

5 hours ago

NEW YORK - FEBRUARY 19: The National Debt Clock is seen February 19, 2004 in New York City. ... More According to a Treasury Department report, the U.S. governments national debt, the accumulation of past budget shortfalls, reached a total of more than $7 trillion for the first time. (Photo by)
The performative exchange of military strikes between Iran and the US means that a nuclear tipped hot war in the Middle East is off the cards for the moment, though the bad news is that a far greater crisis awaits.
In the past five or so weeks prominent financiers – Ray Dalio, Jamie Dimon and even Elon Musk – have warned about the burgeoning fiscal deficit and the mountain of debt that the US (and other countries) has accumulated. A very decent blog post by Indermit Gill, the chief economist at the World Bank, outlines the viewpoint.
Next week, there is a good chance that the Senate passes President Trump's budget, which according to the independent Congressional Budget Office (CBO) will swell the deficit by close to USD 3trn and push debt to GDP towards an unprecedented 125% in the next ten years Additionally, rumours that the next Federal Reserve chair will be picked soon by President Trump (Powell leaves in May 2026) has upset the dollar, making life even more difficult for foreign holders of US debt.
What is interesting is not how gargantuan the world's debt load has become, but how few people care. Politics in the West has changed so much that it has neutered what used to be a political class who in a very Catholic way, pronounced themselves to be fiscally responsible.
In the US, it used to be the case that a good number of Senators were what was called 'fiscal hawks', or had an aversion to large budget deficits, and an even greater aversion to resolving them through higher taxes (the US has only produced budget surplus twice – under Lyndon Johnson and then Bill Clinton – and in both cases taxes were raised). Paul Krugman has referred to deficit hawks as 'deficit scolds', because the spend more time warning about the dangers of the deficit than fixing it.
Ronald Reagan, and the policy makers who surrounded him – namely James Baker, Nicholas Brady and Don Reagan, were fiscally conservative by reputation but had the luxury of being able to grow the US economy through tax cuts and de-regulation. At the time (early 1980's onwards) some Republicans had a 'starve the beast' mindset, which is to say that they favoured lowering taxes so that the government would have less revenue to spend, but there is little evidence that this worked as a strategy (partly because many of the initial Reagan tax cuts were aimed at the rich).
In the post Reagan phase, deficit reduction as a virtue came into its own in the Robert Rubin era (at the Treasury), and many of his former colleagues and acolytes continued this during the early years of the Obama presidency (a relevant private body is the Hamilton Project, where Rubin was a founder).
One of the notable initiatives of the Obama White House was the creation of the US National Committee on National Fiscal Responsibility and Reform or the Simpson-Bowles Commission as it became known, a bi-partisan body that aimed to reduce the fiscal deficit and debt. Its most noteworthy aspect, in my memory, was the degree of civility and collaboration between representatives of the Democrats and Republicans. Such a body could not exist today.
Indeed, the radicalisation of parts of both parties, in the context of quantitative easing (which has dulled the impact of rising debt and deficits) has broken the link between fiscal responsibility and electability. For example, the first crack in the Republican edifice was the advent of the Tea Party Movement, one of whose tenets was tough fiscal responsibility, as inspired by a 'Chicago Tea Party' rant from CNBC commentator Rick Santelli in 2009. Many of the Tea Party oriented voters and Republican politicians then gravitated to the Trump corner in 2016, the price of which was a surrender of their fiscal sacred cows.
Today there is only a handful of fiscally conservative Republican Senators (the Club for Growth publishes an annual scorecard of how fiscally rigorous it thinks members of the House and Senate are). The majority of Republican Senators appear happy to give the nod to a policy that edges the US closer to the financial precipice. Indeed, not only will the Trump budget favour wealthy households but it will increase the number of financially precarious households, and damage healthcare and education provision.
The other interesting observation I draw is that the relationship between debt and politics has now reached a turning point, and from here debt will condition politics. I see this happening in at least three ways.
The first is that in the context of 'zero fiscal space' the constraints imposed by high levels of debt and deficits, will drive new splits within parties, for example between those who are keen to spend more on defence, versus those who wish to preserve social welfare safety nets. The revolt by a large number of Labour MPs against benefit cuts imposed by Keir Starmer is an example. In the future, this cleavage may inspire new political parties. To echo a recent note (The Power Algorithm) new 'tech bro' parties could materialise that prefer using robots to do the work of immigrants and that technology should be deployed for social control.
The second, related scenario is that in the absence of money to spend, the traditional 'pork barrel' cycle of politics disintegrates, and instead politicians tilt the broad political debate to non-fiscal issues – identity, foreign policy, and immigration.
A third element in the hypothesis is that voters observe mainstream politicians to be helpless and useless in the face of very high fiscal constraints, and they become largely apathetic about politics and in some cases vote for extreme candidates, such as 'chainsaw economists' as in the case of Argentina.
In this way, and perhaps exceptionally in history, the coming debt crisis (if the World Bank's economist is correct) will be intertwined with the current crisis of politics.