Deficit to Increase by Over $3 Trillion in a Decade, U.S. Fiscal Path Under Pressure
The non-partisan Congressional Budget Office (CBO) recently estimated that if the "Great and Beautiful Bill," supported by Trump, is passed in the Senate, it will increase the U.S. fiscal deficit by nearly $3.3 trillion over the next decade. The report indicates that if implemented, the bill will reduce federal revenue by $4.5 trillion by 2034, while cost-saving measures will only account for $1.2 trillion, resulting in a significant deficit gap.
Additionally, upon the request from Republicans, if the current policy is used as the baseline for estimation, the cost of this bill over the next ten years is estimated at $507.6 billion. However, using current policy assumptions for budget estimation is considered a rare practice, seen as a means to mitigate the financial impact of the bill procedurally, allowing it to pass the Senate budget reconciliation process with a simple majority.
Tax Reform Continuation and Tax Reduction Policies as Main Drivers
According to the latest estimates from the Joint Committee on Taxation, the bill includes tax cuts amounting to a total of $4.5 trillion, which are the main contributors to the increased deficit. The proposal not only extends the tax reductions from the Trump administration in 2017 but also plans to make three key corporate tax cuts permanent, while limiting certain new tax reductions for worker tips and overtime, and modifying parts of Medicaid provisions.
Furthermore, the bill includes cuts to social safety net programs such as Medicaid and food stamps, aiming to alleviate some fiscal pressure from tax cuts. However, due to its vast scale, fiscal conservatives remain skeptical about the deficit increase, causing resistance in the Senate and leading to multiple revisions of spending cut provisions to meet procedural requirements.
Fiscal Sustainability Sparks Controversy
Democrats and some economists argue that using the current policy as a baseline for budget estimation allows Republicans to bypass the original deficit limit rules, potentially jeopardizing the long-term sustainability of U.S. finances and increasing future debt burdens and interest costs. Previously, CBO estimates of the House-passed tax reform bill showed it would increase the deficit by $2.8 trillion over the next decade, including economic impacts and debt-driven interest rate rises.
The Senate version is costlier, seen as a continuation of Trump's economic agenda, comprising tax cuts, reductions in social welfare spending, and adjustments to the state-local tax deduction cap. The cap will remain at $40,000, but its term is reduced from 10 years to 5 years to lessen short-term fiscal burden.
Amidst Policy Divergence, U.S. Fiscal Outlook Remains Unclear
While Trump and Republicans maintain that large-scale tax cuts and reductions in social welfare spending will stimulate economic growth, boost employment, and offset the deficit through increased tax revenues, this view is widely questioned by academia and the Democratic camp, who worry that high debt levels will weaken the U.S.'s ability to respond to future economic crises and maintain fiscal flexibility.
With the July 9 tariff deadline, electoral politics, and Federal Reserve monetary policy adjustments all intersecting, the progress of Trump's tax reform plan is expected to continue sparking market volatility and policy controversy, leaving the trajectory of U.S. fiscal policy a focal point for global investors and the economic community.
