Trump鈥檚 tax and spending plan could sharply raise interest rates
Donald Trump鈥檚 tax and spending plan could nearly triple interest rates and increase the federal government鈥檚 debt by $14 trillion by 2026,听听by Mark Zandi and his colleagues at Moody鈥檚 Analytics. In 2018, the federal government could be paying more than $900 billion in interest鈥攏early twice what it pays today. By 2026, it could be paying more than $1.8 trillion in debt service, 50 percent more than under current fiscal policy.
Zandi primarily looked at the effects of Trump鈥檚 plan on the overall economy. And it would be bad: His economic听policy would throw the country into a recession by early 2018 and dampen growth over the next decade. But let鈥檚 just focus on what it could mean for interest rates and the federal debt.
The heart of Trump鈥檚 plan is his rewrite of the federal tax code. In December, the Tax Policy Center听听his proposal would reduce federal revenues by $9.5 trillion over 10 years, and by nearly $1.2 trillion in 2026 alone. TPC assumed that, if not offset by spending cuts, Trump鈥檚 plan would add $1.7 trillion in interest costs over the decade鈥�$385 billion in 2026鈥攁ssuming no change in interest rates. So far, Trump has not specified spending reductions beyond his promises to cut 鈥渨aste, fraud, and abuse鈥� eliminate a few modest federal programs, and cap the federal share of Medicaid.
Zandi and his colleagues looked at Trump's听tax and spending plans, as well as his proposed immigration and trade policies. They听assumed Congress would reduce planned spending by about $1.5 trillion over 10 years. Still, the Trump plan would result in a听big bump in borrowing. And Zandi found those higher deficits听would drive up rates significantly.听
Let鈥檚 look at the yield on the benchmark 10-year Treasury bonds. This morning, 10-year Treasuries听听about 1.68 percent. Moody鈥檚 projects they鈥檒l average about 2.4 percent for all of 2016 and about 3.6 percent in 2017, assuming no change in fiscal policy (remember the Fed has signaled plans to slowly ratchet up rates).
If Trump鈥檚 tax and spending plan becomes law, those rates would skyrocket. Moody鈥檚 estimates they鈥檇 average 5.6 percent next year and 8.6 percent in 2018鈥斕齛nd enough to help drive the economy into recession. With slow growth, rates would bottom at 5.7 percent in 2023, then rise again to 6.7 percent in 2026.
Not surprisingly, Zandi projected听that the toxic combination of higher borrowing costs and more debt would sharply increase federal interest payments. They鈥檇 balloon from $494 billion this year to $931 billion in 2018--$125 billion more than Moody鈥檚 projects under current law. By 2026, Treasury would be paying $1.8 trillion in interest on its debt, one-third more than under current law.
Interest would become the federal government鈥檚 single biggest expense, 2.5 times spending for national defense, $550 billion more than Medicare, and $200 billion more than Social Security. Interest payments would consume 6.7 percent of the nation鈥檚 total economic output, and one quarter of all government spending.
In the end, those higher rates would result in some combination of higher taxes and fewer government programs. But that鈥檚 not all. They鈥檇 also drive up the cost of private money. Businesses would have to spend more to acquire equipment, and households would pay more to borrow for a new house or car.
Trump鈥檚 plan would cut taxes significantly for nearly everyone. TPC estimated the average tax cut in 2017 would top $5,000. But higher interest rates would eat up most of those tax savings鈥攁nd many families may pay more in interest than they鈥檇 save in taxes.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.听
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