Disentangling the economic implications of ‘Big Beautiful Bill'
At its core, the bill enacts significant changes to the US tax code, extending and expanding tax cuts for high income individuals and corporations, while scaling back funding for safety-net programs, and re-defining spending priorities. The reforms sparked intense debates over its distributional impact and long-term sustainability. Given the magnitude and span of the OBBB, its macroeconomic implications are substantial in scale, and wide-ranging in scope. In this article, we analyse the main aspects of the OBBB along three key dimensions.
First, the bill is set to have a meaningful expansionary impact on the economy over the next decade. According to estimates by the Congressional Budget Office (CBO), real GDP would increase on average by 0.5% over the 2025-2034 period, relative to a scenario without the implementation of the bill. This is a relevant impact on the economy, considering that average annual economic growth in the US has been 2.2% over the last two decades.
The effects would be largest in the short term, with the bill boosting GDP by 0.9% in 2026. The initial push in economic activity would come to a large extent from an increase in aggregate demand, due to higher disposable income for more prosperous households, and items that incentivize investments. Beyond 2026, lower tax rates will improve the incentives to work, increasing labour participation and working hours and, therefore, promoting growth. Overall, the different growth mechanisms point to a positive and significant boost to economic activity.
Second, the OBBB will substantially increase the US federal deficit and the path of debt in the coming years. The bill includes a battery of measures that will put pressure on public finances, including the extension of tax cuts, reduced corporate tax revenues, and expanded deductions. On the other hand, some spending cuts are included, mainly targeting entitlements and safety-net programs, but are smaller in relative terms. Over the period between 2025 to 2035, the bill would add an estimated USD 4.6 trillion to the deficits. As a result, federal debt is expected to reach close to 128% of GDP by 2034, its historical maximum. This far surpasses the 119% mark reached in 1946, when the country was absorbing the costs of the World War II economy and the immediate post-war recession.
The sizable increase in the volume of US Treasury debt will certainly test the appetite of international markets, leading to a rise in interest rates. The increase in the supply of Treasury instruments will result in a fall in their price, and therefore an increase in yields. The CBO and Yale Budget Laboratory estimate the OBBB will increase interest rates on 10-year Treasury notes by an average 14 to 30 basis points (b.p.) over the period 2025-2034. This increase in debt costs is not negligible, but it is not exceptionally disorderly considering fluctuations in yields that are typically observed on any given year. Although the upward shift in the trend of debt is substantial and raises some long-term sustainability concerns which eventually need to be addressed, it is unlikely that these dynamics will generate major disruptions in financial markets over the next 10 years.
— By QNB Economics
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