MW America's debt is at a breaking point - Trump's tax bill might just push it over the edge

By Robert C. Pozen

Investors are no longer confident that the U.S. will manage its finances responsibly over the long term

Congress is throwing fuel on the fire. There is no compelling economic rationale for this bill in its current form.

Congress is poised to pass a reconciliation bill, politically dubbed the "One Big, Beautiful Bill," that could do serious harm to America's economic future.

With much higher tariffs already clouding the economic outlook, this legislation would expand the U.S. federal deficit dramatically, with little justification in terms of macroeconomic policy or national investment. If enacted, the bill would not only deepen the country's long-term debt burden but also heighten the risk of a self-reinforcing cycle of higher interest rates and slower economic growth.

Let's start with the facts. The House-passed version of the bill would add roughly $2.5 trillion to the national debt over the next decade - before accounting for the higher interest payments that would result from that borrowing.

That's the optimistic case. The bill includes several large tax breaks that are scheduled to expire in the coming years, including bonus depreciation, an exemption on taxed tips and a carveout for overtime pay. But recent history suggests that Congress is unlikely to let those provisions lapse. If these tax breaks are extended - as many observers expect - the cost of the bill would swell to around $5.3 trillion, according to the nonpartisan Committee for a Responsible Federal Budget.

At that level, the U.S. debt-to-GDP ratio would exceed 200% by 2055. For context, America's current debt level stands at roughly 121% of GDP, according to the U.S. Office of Management and Budget and the St. Louis Federal Reserve. The debt burden is no longer just a distant concern. It is a present and pressing problem - and one that this legislation would dramatically worsen.

Read: Here's where the Senate could make changes to the GOP's megabill

On the brink

The idea that the U.S. can grow its way out of this debt is a dangerous delusion. The historical trend is clear. In 1993, when the Bipartisan Commission on Entitlement and Tax Reform was established, the debt-to-GDP ratio was 48%. Thanks to bipartisan efforts during the Ronald Reagan and George H.W. Bush administrations - and continued fiscal restraint under President Bill Clinton - debt fell to about 33% of GDP by the time George W. Bush took office in January 2001.

However, the tide turned quickly. By 2010, when the Simpson-Bowles Commission was formed to recommend fiscal reform, the debt had already risen to 56% of GDP. Since then, successive waves of tax cuts and spending increases, from both Republicans and Democrats, have pushed America's debt load ever higher.

Now, rather than stabilizing the situation, Congress is throwing fuel on the fire by substantially increasing upward pressure on the ratio of debt to GDP.

Bad timing

The House bill undermines strategic investments that could foster long-term growth.

What makes this bill particularly reckless is its timing. Historically, large fiscal expansions, especially ones that involve deep tax cuts, have been justified during times of economic crisis. For example, during the 2008-09 financial crisis or the early days of the COVID-19 pandemic, Congress enacted legislation to support demand, preserve jobs and stabilize household income

But now the U.S. economic landscape looks very different. The country is not in a recession. Americans are not experiencing mass unemployment. Instead, the U.S. faces heightened inflationary risk, geopolitical uncertainty and erratic tariff policies. There is no compelling economic rationale for this bill in its current form.

To make matters worse, the House bill undermines strategic investments that could foster long-term growth. It cuts close to $1 trillion in health care and food assistance - programs that not only support vulnerable families but also inject money into local economies and reduce future public-health costs. Moreover, the House bill scales back incentives for investments in clean energy and innovation projects, which are essential to maintaining America's global competitiveness.

The net result is a policy that increases deficits without increasing growth-the worst of both worlds.

Financial markets are worried

Bond markets are already signaling deep concerns about the U.S. fiscal outlook. Under normal conditions, rising fears of a recession would lead investors to buy long-term government bonds, which would lower yields. But today, we're seeing something different: an upward shift in the Treasury yield curve with a broad sell-off of long-term Treasurys, including 20- and 30-year bonds.

This suggests that investors are no longer confident that the United States will manage its finances responsibly over the long term. The term premium- the extra compensation investors demand for holding long-term bonds- has been rising, indicating fears of higher inflation and increased borrowing costs down the line.

Those fears are reflected in America's sovereign credit ratings. In May, the U.S. lost its last remaining top-tier triple-A credit rating from Moody's, following earlier downgrades from Fitch and Standard & Poor's. This means all three major ratings agencies now believe that the U.S. government is a riskier bet than it used to be.

Read: 'You are going to panic,' Jamie Dimon tells regulators about what will happen when the bond market cracks

A vicious cycle

What America risks is a vicious cycle; larger deficits lead to higher interest rates, which in turn make it more expensive to service debt. That increases deficits further, pushing up rates again, and so on. This feedback loop could paralyze fiscal and monetary policymakers alike.

The U.S. Federal Reserve's ability to steer the economy through interest rate adjustments depends on market confidence. If rates are rising due to runaway debt, the Fed may find itself forced to raise short-term rates even higher, just to keep inflation expectations in check - potentially slowing growth in the process.

Moreover, many of the long-run fiscal projections produced by the Congressional Budget Office $(CBO)$ may be overly optimistic. The CBO generally assumes that interest rates will remain relatively modest even as deficits grow. But markets may prove less forgiving. If interest rates exceed economic growth rates, the U.S. will come to a tipping point where it will be faced with painful choices between raising taxes, cutting spending or risking a fiscal crisis.

Current law already puts the U.S. on track to reach that tipping point by 2044, according to the CBO. The reconciliation bill would accelerate the timeline - and deepen the eventual reckoning.

Read: Trump's spending bill comes with huge costs that many voters don't seem to understand

Ordinary Americans pay the price

There is a world of difference between fiscally responsible policymaking and the reckless abandonment of basic budget principles.

Deficits are not abstract accounting exercises. They translate into real-world costs for American households and businesses. As interest rates rise, American families face steeper payments on mortgages, car loans, and credit card balances.

The bill also threatens to eliminate more than 1 million jobs by cutting health and nutrition programs that support working families. And it would worsen the already high cost of borrowing for small businesses, potentially thwarting their growth.

All of this undermines the central promise of the bill - that tax cuts will generate prosperity for all. In reality, the economic benefits of these tax breaks are heavily skewed toward the higher income brackets, while the total costs of the House bill will be borne disproportionately by lower-income Americans.

For example, households with annual incomes between $17,000 and $51,000 would on average lose $430 in 2026, while households with annual incomes between $388,000 and $988,000 would on average gain $17,835, according to the Penn-Wharton Budget Model.

Read: Elon Musk calls Trump tax bill an 'abomination.' Does he have the clout to stop it?

Fiscal discipline isn't partisan

This is not an argument against tax reform or government efficiency. Thoughtful, targeted measures can improve economic outcomes and spur growth. But there is a world of difference between fiscally responsible policymaking and the reckless abandonment of basic budget principles.

The "One Big, Beautiful Bill" is a misnomer. It is fiscally unsound, economically unjustified, and dangerously timed. If we care about America's long-term prosperity, Congress must return to the hard work of prioritizing investments, containing deficits, and ensuring that today's policies don't mortgage the future. Now is the time for fiscal discipline, not more debt-fueled delusions.

Robert C. Pozen is a senior lecturer at MIT Sloan school of Management and former President of Fidelity Investments.

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-Robert C. Pozen

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June 07, 2025 11:37 ET (15:37 GMT)

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