Trump Tax Bill Averts One Debt Crisis but Makes Future Financial Woes Worse

• President Donald Trump's tax-cut and spending bill, which passed Congress on Thursday, July 3, 2025, averts the near-term prospect of a United States (U.S.) government default but makes America’s long-term debt problems even worse.
• Republican lawmakers in the House of Representatives approved the bill that will extend Trump's 2017 tax cuts, authorise more spending on border security and the military, make steep cuts in Medicare and Medicaid, and add trillions to the government's debt. Trump signed the bill into law on Friday, July 4, 2025.
• As part of the tax package, lawmakers raised the U.S. government's $36.1Tn borrowing limit that it was projected to hit later this summer by $5Tn, a move that will assuage concerns over a possible default on U.S. debt. Analysts had estimated that the so-called X-date, when the Treasury would no longer be able to pay all of its obligations without an increase or suspension of the debt limit, could have occurred at the end of August or in early September.
• Longer term, however, the bill has largely been seen as bad news for the U.S. bond market and the nation's fiscal health. It will add $3.4Tn to the nation's debt over the next decade, nonpartisan analysts have estimated. That would exacerbate concerns over additional bond supply and dwindling demand for U.S. Treasuries that have been a key driver of financial markets in recent months.
• BlackRock warned on Monday, July 7, 2025, that foreign buyers were already souring on American debt. There was a real risk that demand for the $500Bn in debt the U.S. issues every week would fall even more and push borrowing costs higher. "We’ve been highlighting the precarious position of the U.S. government’s indebtedness for some time now, and, if left unchecked, we view debt as the single greatest risk to the 'special status' of the U.S. in financial markets," BlackRock's investment managers said in a note.
• The legislation also stokes economic growth by allowing businesses to fully expense equipment purchases as well as research and development costs and provides other tax breaks. Some investors, however, worry the debt overhang could curtail the economic stimulus in the bill, which Trump refers to as the "One Big Beautiful Bill".

(Source: Reuters)