Washington has faced criticism for its fiscal discipline over recent decades, with both Republicans and Democrats contributing to the gradual degradation of the nation’s finances.
However, the legislation passed by Senate Republicans on Tuesday is being highlighted by analysts as particularly detrimental to the budget. An initial analysis indicates that it could add at least $3.3 trillion to the national debt over the next decade, making it one of the most expensive bills in a generation. Additionally, it is expected to significantly reduce tax revenue for decades, potentially leading to a major shift in the nation’s fiscal trajectory and increasing the risk of a debt crisis.
This situation arises from Senate Republicans voting to make tax cuts, initially enacted in 2017, a permanent aspect of the tax code. Consequently, the growth of the national debt, which is already at concerning levels, is projected to accelerate as the bill diminishes the country’s primary source of revenue.
Experts, such as Jessica Riedl from the Manhattan Institute, have described this legislation as possibly the most expensive since the 1960s, warning that Congress is compounding trillions in new borrowing on top of existing deficits.
Historically, significant changes to the nation’s finances have required bipartisan support, which has helped limit the amount of debt added at any given time. The Republicans utilized a special legislative procedure known as reconciliation to pass the bill along party lines, circumventing the filibuster. This method traditionally mandates that bills cannot increase the debt for more than a decade, but Republicans have employed an accounting strategy to argue that the $3.8 trillion cost of extending the 2017 tax cuts is effectively zero, allowing for indefinite continuation.
This approach not only opens the door to a larger long-term debt increase but also suggests a diminishing seriousness among lawmakers regarding debt containment, according to analysts. Bond markets have already shown signs of stress as the bill progresses.
As the bill returns to the House, its cost remains a critical issue, with some hard-right lawmakers demanding a cheaper version before offering their support. Reducing the bill's overall cost, largely driven by tax cuts, may necessitate further cuts to the social safety net, presenting its own political challenges.
Even without this legislation, the national debt is projected to reach unprecedented levels in the coming decades. The Congressional Budget Office estimates that public debt, currently equivalent to the size of the economy, could grow to approximately 56 percent larger than the economy by 2055. Making the 2017 tax cuts permanent could result in the debt exceeding twice the size of the economy within the next 30 years.
The potential worst-case scenario for the nation’s debt involves investors losing confidence in the government’s ability to repay its obligations, which could lead to higher interest rates on government bonds. This shift would likely increase borrowing costs across the economy, adversely affecting Americans' financial situations.
Despite the challenges, the persistence of the 2017 tax law, which reduced individual income rates and expanded the standard deduction, is not unexpected. Lawmakers from both parties are generally reluctant to reverse tax cuts, and bond investors have likely anticipated higher deficits resulting from the extension of the 2017 law.
Moreover, the Republican bill not only extends existing tax cuts but also introduces new ones, including provisions related to tips and overtime pay. These new policies are set to expire in 2028, requiring Congress to revisit the issue of extending tax cuts, which is likely given their popularity.
Some budget analysts estimate the cost of the Senate bill to exceed the initial $3.3 trillion figure. They include interest payments associated with the borrowing, raising the total to approximately $3.9 trillion. Additionally, when considering the long-term implications of tax policies, the total cost could reach $5.3 trillion.
This substantial impact on the budget will complicate future fiscal negotiations, especially as experts prepare for the anticipated depletion of Social Security’s trust fund by 2033, which could threaten its ability to make full payments. Reduced tax revenue will likely hinder efforts to address this widely supported program.
Analysts warn that the fiscal changes introduced by this legislation will make it increasingly difficult to tackle Social Security insolvency when it arises, leaving future administrations with significant challenges in managing the nation’s fiscal health.