When Donald Trump last occupied the White House in 2020, the annual cost of servicing the national debt stood at $345 billion. This figure, though substantial, was manageable due to historically low interest rates. At the time, it was feasible to accumulate more debt through tax cuts and pandemic relief measures because the low borrowing costs ensured repayment burdens remained relatively modest, even as overall debt levels rose significantly.
However, the financial landscape has shifted drastically since then. According to projections from the Congressional Budget Office, the cost of servicing the national debt could surpass $1 trillion by next year. This staggering amount is higher than the expected expenditure on national defense and exceeds combined spending on infrastructure, food assistance, and other Congressional programs.
The dramatic rise in debt servicing costs is largely attributed to climbing interest rates. In April 2020, at the height of the government’s pandemic borrowing spree, the yield on 10-year Treasury notes hit a record low of 0.6%. Fast forward to today, and those yields have surged to 4.4%. This increase reflects investors’ anticipation that a Trump administration would implement income tax cuts, potentially adding trillions of dollars to already ballooning deficits.
Democratic President Joe Biden can counter critiques by pointing to robust economic growth and his administration’s success in avoiding a recession, even as the Federal Reserve raised interest rates to combat inflation. Nonetheless, deficits have remained unusually high during his term. This is partly due to Biden’s policies, which include significant investments to boost domestic manufacturing and combat climate change, as well as the residual effects of Trump’s previous tax cuts.
As Trump’s allies and Republican lawmakers prepare for a possible return to power, they are exploring ways to curb government spending to reduce debt and lower interest rates. Criticizing Biden for his handling of deficits and inflation, they aim to set the stage for potential fiscal reforms under Trump’s leadership.
Key figures in Trump’s camp, including wealthy entrepreneurs Elon Musk and Vivek Ramaswamy, have floated controversial ideas to address government spending. Among their proposals is the refusal to spend funds already approved by Congress, an approach Trump has shown interest in. However, such a move would almost certainly face legal challenges, as it undermines congressional authority over federal expenditures.
Russell Vought, Trump’s budget director during his first term and a likely pick for the role again, has proposed an alternative budget plan. This plan outlines over $11 trillion in spending cuts over the next decade, with the ultimate goal of achieving a surplus.
Michael Faulkender, a finance professor and former Treasury Department official under Trump, has advocated for the repeal of all energy and environmental provisions within Biden’s 2022 Inflation Reduction Act. Speaking before a congressional committee in March, Faulkender argued that dismantling these components would significantly reduce deficits.
Additionally, Trump has expressed support for imposing tariffs on imports as a revenue-generating measure to shrink the deficit. Meanwhile, some Republican lawmakers, such as House Budget Committee Chairman Jodey Arrington of Texas, have suggested implementing work requirements for Medicaid recipients as a cost-cutting strategy.
The current predicament is reminiscent of the early years of Bill Clinton’s presidency, when high interest rates similarly forced the White House to confront the escalating cost of servicing the national debt. Back then, rising yields on 10-year Treasury notes prompted Clinton and Congress to negotiate a deficit reduction agreement, which ultimately led to a budget surplus by 1998.
Reflecting on that era, Clinton political adviser James Carville famously quipped about the power wielded by bond investors in shaping government policy. “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter,” Carville said. “But now I would like to come back as the bond market. You can intimidate everybody.”
As Trump eyes a return to the Oval Office, the interplay between rising debt, interest rates, and government spending will likely take center stage in the nation’s political discourse. Whether his administration can tackle these challenges while delivering on campaign promises remains to be seen.
