There is endless speculation about the chaos that may (or may not) await America and the world after the inauguration of US President-elect Donald Trump. No one knows how much of Trump's announced plan is "real" and how much of it is just a political show for his voter base, a show of power in front of his opponents, or part of a negotiation strategy with Congress and various foreign friends and enemies. But for all his loud bragging and supporters who want to create an alternate reality, Trump cannot, try as he might, repeal the laws of arithmetic when, in the coming days, the government reaches the federal debt ceiling.
Government deficits represent the difference between annual revenues and expenditures, while government debt is the sum of previous deficits. These facts have real political implications, because the United States of America has a legally defined debt limit (the law prescribes a limit on how much the country can borrow). On December 28, Dženet Jelen, the outgoing finance minister, officially announced that the limit would be reached "between January 14 and 23."
By taking "emergency" measures, Biden can shift the problem to the future Trump administration - as a parting gift for Trump's refusal (with the support of Elon Musk) to fulfill previously concluded agreements. Trump could delay that critical day, but only briefly. With a fiscal deficit of $367 billion in November and an average monthly deficit of $150 billion in fiscal year 2024, the wait for the current debt to reach the ceiling will not be long. An additional $110 billion, approved through the Christmas deal for emergency and disaster management, only makes the problem harder to solve. Meanwhile, extremists in the Republican Party are insisting that the debt limit not be raised, which would require the deficit to be completely eliminates.
If Trump fails to win over all Republicans, he will need some Democratic support to reach a new deal on the debt limit and future deficits. But why would Democrats agree to raise the debt limit if it would, in effect, only allow Trump to reward the electoral support of Musk and other oligarchs through massive and unfair tax cuts?
All this congressional political bickering over the deficit and the debt represents only one part of the budget trilemma that Trump will face on his first day in office. Another aspect is taxes. If there's one thing Trump and his allies are truly committed to, it's cutting taxes for corporations and billionaires. Their guiding "principle" is to permanently maintain, "lock in", the recklessly low tax rates that Trump signed during his first mandates (many of which expire at the end of 2025), as well as to further reduce taxes on American corporations. Most estimates suggest it would increase the national debt by $7,5 trillion, while the Committee for a Responsible Federal Budget's top estimate is as much as double that amount.
Of course, the Trump administration will promise a "miracle" of economic growth, pulling out of mothballs the old fairy tale that tax cuts pay for themselves. It doesn't matter that it never happened—not after the 2017 tax cuts, and not after Ronald Reagan's tax cuts in the 1980s. In fact, the tax policies of the first Trump administration will already cost an estimated $1,9 trillion over a ten-year period. On that basis, it would take a fiscal Houdini - or unprecedented budget fraud - to turn $7,5 trillion into $0.
This brings us to the third aspect of the trilemma: reducing consumption. It is well known that the majority of US government spending is not discretionary but is intended for programs such as Social Security, which even most Republicans are reluctant to cut. In addition, almost half of discretionary spending is allocated to defense - a budget item that Republicans place great importance on. That leaves only about $750 billion for discretionary spending outside of defense.
To eliminate the deficit, Trump would have to cut all non-defense discretionary government programs — not just spending on education and national parks, but the Homeland Security agencies through which his administration is supposed to carry out its relentless anti-immigration policies. . Even so, he will face a $1 trillion annual deficit without even starting to cut taxes, 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 the Europeans to increase defense spending to 5% of GDP. If the US, which currently spends 3,1% of GDP on defense, did the same (and it would be extremely hypocritical not to), spending would increase by about $600 billion a year.
Of course, a compromise between the two sides is still possible. That would include progressive tax reform (where the wealthier pay more) and provisions to strengthen government programs that play a vital role in the lives of millions of Americans. The "debt hawks" and oligarchs around Trump wouldn't like that, but since the super-rich don't need government programs (or at least they believe so), why not exclude them from the negotiation process?
Judging by Trump's performance so far, such a compromise will not be easy to reach. There will be chaos similar to what we have already seen during the near total shutdown of the federal government a few days before Christmas. The solution was to postpone the problem until Trump entered the White House. But what will be the solution next time?
As we enter the new year, the lives and well-being of hundreds of millions of people will depend on how quickly and effectively this problem can be resolved. Trump and his supporters may want to upend the world order, but first they need to get America in order. However, it is not at all clear how they will achieve this.
The author is an American economic expert; he is a Nobel Prize winner in economics and a professor at Columbia University; was the chief economist of the World Bank (1997-2000)
Copyright: Project Syndicate, 2025. (translation: NR)
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