There has been endless speculation about the chaos that may (or may not) await America and the world following US President-elect Donald Trump’s inauguration on January 20. No one knows how much of Trump’s stated agenda is “for real,” and how much of it is political posturing for his base, a show of power for his enemies, or part of a negotiating strategy vis-à-vis Congress and various foreign friends and adversaries. But for all his bluster and devotees who want to create alternative realities, Trump cannot repeal the laws of arithmetic, as much as he may try in the weeks ahead, when the government hits the federal debt limit.
Government deficits are the difference between annual revenues and expenditures, and the national debt is the sum of past deficits. These facts have real political implications, because the United States has a statutory debt ceiling (by law, there is a limit to how much it can borrow). On December 28, Janet Yellen, the outgoing Secretary of the Treasury, provided official notice that the ceiling would be hit “between January 14 and January 23.”
By taking “extraordinary” measures, Biden can pass the problem on to the incoming Trump administration as a parting gift in return for Trump’s refusal (supported by Elon Musk) to go along with the deal that had been made earlier; and Trump might be able to postpone the day of reckoning further, but only briefly. With a $367 billion monthly fiscal deficit in November and a 2024 fiscal deficit averaging $150 billion per month, it won’t be long before the current debt ceiling is breached. The $110 billion or so added in the Christmas deal for disaster and emergency spending won’t make the task any easier. Meanwhile, extremists in the Republican Party are insisting that the ceiling not be increased, which means that the deficit would have to be eliminated entirely.
If Trump cannot bring all Republicans along, he will need to secure some support from the Democrats by reaching a new agreement on the debt ceiling and future deficits. But why should the Democrats agree to increase the debt ceiling if it merely enables Trump to reward Musk and other oligarchs for their support by giving them a massive and unjust tax cut?
All this congressional politicking over the deficit and debt represents only one horn of the budget trilemma that Trump will face on day one. Taxation is the second horn. If there is only one thing that Trump and his cronies are truly committed to, it is cutting taxes for corporations and billionaires. Their guiding “principle” is to make permanent the reckless tax cuts that Trump signed during his first administration (many of which are set to expire at the end of 2025), and to lower still more taxes on US corporations. Most estimates suggest that doing so would add $7.5 trillion to the national debt, though the Committee for a Responsible Federal Budget’s top-end estimate is double that amount.
Of course, the Trump administration will promise some growth miracle, trotting out the old canard about tax cuts paying for themselves. Never mind that this has never happened – not after the 2017 tax cuts, and not after Ronald Reagan’s tax cuts in the 1980s. In fact, the first Trump administration’s tax policies are already expected to cost $1.9 trillion over a ten-year period. From that starting point, it would take a fiscal Houdini – or an unprecedented level of budgetary dishonesty – to convert $7.5 trillion into $0.
That brings us to the third horn of the trilemma: expenditure cuts. It is well known that most US government expenditures are not discretionary; they are committed to programs like Social Security, which even most Republicans are loathe to cut. Moreover, nearly half of discretionary spending goes to defense – another budget item dear to Republicans. That leaves only around $750 billion in non-defense discretionary spending to account for. To eliminate the deficit, Trump would have to eliminate all non-defense discretionary government programs – not just the Department of Education, but also the national parks and the homeland security agencies that his administration will need to enforce its ruthless anti-immigration policies. Even then, he would be left with a $1 trillion annual hole before getting his tax cut, which becomes mathematically impossible if only a handful of Republican lawmakers keep their promise not to increase the deficit.
At the same time, Trump wants Europeans to increase their defense spending to 5% of GDP. If the US, which currently spends 3.1% of GDP on defense, were to do the same (it would be the height of hypocrisy otherwise), that would add around $600 billion per year.
Of course, a bipartisan compromise is still possible. That would entail a progressive tax reform (whereby higher earners pay more) and provisions to strengthen the government programs that have played such an important role in millions of Americans’ lives. This would not please the debt hawks or the oligarchs surrounding Trump, but the superrich don’t need government programs (or so they believe), so why not cut them out of the process?
Judging by Trump’s record, such a compromise will not come easily. There will be chaos, as we already saw with the near-shutdown of the federal government days before Christmas. The solution on that occasion was to kick the can down the road until Trump is in the White House. But what will the solution be next time?
As we enter a new year, hundreds of millions of people’s lives and well-being will depend on how smoothly and quickly this quandary is resolved. Trump and his supporters may want to overturn the world order, but first they must get America’s own house in order, and it is far from clear how they will do it. - Project Syndicate
Joseph E. Stiglitz, a former chief economist of the World Bank and former chair of the US President’s Council of Economic Advisers, is University Professor at Columbia University, a Nobel laureate in economics, and the author, most recently, of The Road to Freedom: Economics and the Good Society (W. W. Norton & Company, Allen Lane, 2024).