Trump's tax cut faces a new snag: America's debt crisis is back in the spotlight

CNN

20-05-2025

After the United States lost its last perfect credit rating on Friday, Republicans and Democrats responded by pointing fingers at each other.
Moody's Ratings said problematic debt levels far outpacing government revenue led to the downgrade. Now, it's up to lawmakers on both sides to take actions to improve the nation's fiscal situation, or another downgrade could be in the cards. And that one would likely be even more painful.
Yet, days later, House Republicans on the Budget Committee voted to advance a sweeping legislative agenda that could worsen the fiscal picture, adding over $1 trillion to annual deficits by 2034 compared to 2024, according to preliminary estimates from the nonpartisan Committee for a Responsible Federal Budget.
However, it's far from a done deal, as it faces a slew of hurdles in both chambers of Congress despite Republicans having a majority. Even Trump administration officials have suggested the agenda, dubbed the 'one, big, beautiful bill,' could be modified to get it to the finish line.
But some Trump administration officials insist the agenda, which calls for trillions of dollars in tax cuts that exceed a wide array of spending cuts, won't add to the nation's budget deficit, the gap between what the government collects in revenue versus how much it spends. That difference is financed by borrowing money from people who invest in US bonds and Treasuries, which pay a varying amount of interest, also known as the yield.
For instance, White House Council of Economic Advisers Chair Stephen Miran said in a CNBC interview on Monday that efforts included in the bill to 'cut waste, fraud and abuse are going to end up bringing the deficit down by almost half a point of GDP, or maybe even a little bit more than that.'
Earlier in the day, White House press secretary Karoline Leavitt told reporters, 'This bill does not add to the deficit.'
Had Moody's not downgraded US debt two days prior, Republican lawmakers in particular may have been more willing to take such comments at face value. But now, with the fiscal situation back in the spotlight, more diligence could be warranted.
'Moody's downgrade reflects concerns stemming from years of bad fiscal decisions in Washington,' Michael Peterson, CEO of the Peter Peterson Foundation, which advocates for America's fiscal stability, told CNN. The country already is on track to add $22 trillion more to the $36 trillion debt level over the next decade, he said. President Donald Trump's bill 'would only accelerate the pace of borrowing by adding trillions to this already unsustainable path.'
On Monday, investors took note of the risks Moody's outlined in explaining its decision to downgrade US debt to one notch below perfect. Key to that was 'the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,' Moody's said in its Friday statement.
Yields on 30-year US bonds soared by over a percentage point, touching 5% at one point on Monday, while yields on shorter-term debt held by the US government also rose. Both point to the same message: The risks of investing in American debt, long considered the safest asset, have grown.
Consumers, just like the government, tend to have to pay more to borrow money when yields rise since banks and other lenders often base interest rates on US Treasury and bond yields.
'With our divisive politics preventing progress, it's no surprise that financial markets are watching — and increasingly worried,' Peterson added.
Callie Cox, chief market strategist at Ritholtz Wealth Management, similarly alluded to rising yields on US debt as a wake-up call for lawmakers. 'The government deficit isn't a problem until investors think it is. And they're increasingly telling us that the deficit is a problem,' Cox said in a note on Monday.
Ryan Sweet, chief US economist at Oxford Economics, said the downgrade increases the odds that Trump's package, if passed, will carry fewer tax cuts than what's currently being proposed to minimize the deficit impact.
'The downgrade will catch the attention of the fiscal hawks and make it unlikely that some of the proposed features, including no taxes on overtime and an enhanced standard deduction for seniors aged 65 and older that are not in our baseline, will be included in the fiscal package,' he said in a note on Monday.
Sweet also said the downgrade will likely extend the length of time it takes to pass the bill, if at all. Meanwhile, top Trump administration officials, including National Economic Council Director Kevin Hassett, say they're optimistic it'll pass by the middle of this summer.