“The price of freedom”. This is how Secretary of the Treasury Alexander Hamilton defined the debt of the United States in January 1790, on the occasion of the first report on public credit. More than two centuries later, the bill is dizzying: the American debt exceeds 35,000 billion dollars. At this stage, without damage… This amount may have multiplied fivefold in around twenty years, but it does not scare investors. “American debt is able to position itself thanks to the unique status of the dollar and a marginally higher rate,” notes Vincent Mortier, investment director of Amundi, the number one European asset manager.
During the presidential campaign, the issue of debt was not at the heart of the debates, eclipsed by concerns about inflation or growth. However, according to the think tank Committee for a Responsible Federal Budget (CRFB) the candidates’ programs both led to a further deterioration. Donald Trump, in line with his previous mandate, focused on lowering taxes. On the menu: the extension of the temporary provisions included in the Tax Cuts and Jobs Act (TCJA) – a major tax reform of 2017 – which were supposed to expire at the end of 2025. At the same time, the president-elect planned a reduction in the tax on companies producing in the United States, which would drop from 21% to 15%. In his hood, Republican Santa Claus also carries the tax exemption for overtime and tips and the revision of the taxation of Americans abroad. So how to finance all of this?
The main lever mentioned by Donald Trump would be the application of customs duties on imports, up to 60% for China and at least 10% from the rest of the world. Even if the orders of magnitude are far from coinciding: “American imports represent 3,000 billion dollars, while the income tax base amounts to 20,000 billion”, recalls Bruno Cavalier, chief economist at Oddo BHF.
Uncertain revenues
If this cocktail of measures were actually put in place, it would be America’s financial health that would suffer. The CRFB calculates, in its central scenario, that Donald Trump’s program would increase the federal debt by 7,750 billion dollars between 2026 and 2035. And tax revenues would be reduced by 3,000 billion dollars over the next decade, after the Tax Foundation model. Nevertheless, “everything linked to Donald Trump’s program is currently uncertain. We do not yet know the name of the Secretary of the Treasury for example, points out Samy Chaar, chief economist of the Swiss bank Lombard Odier. If his approach on customs tariffs is rather transactional, we do not know what income he will be able to obtain from it. It is indeed possible that Trump’s protectionist threats will mainly serve as a means of pressure to obtain trade concessions from his partners. They could therefore be temporary, limited to the duration of vigorous negotiations.
At the same time, the new president is banking on cutting spending thanks to greater “governmental efficiency”. A separate department is dedicated to this objective. At its head, the faithful Elon Musk does not lack ambition. During a conference at the end of October, the boss of Tesla said he was capable of cutting 2,000 billion in public spending, or almost a third of the total. “Your money is wasted and the Department of Government Efficiency will correct it,” he proclaimed to a won over audience. If Twitter’s experience is to be believed, its vision of efficiency rhymes with massive layoffs.
Failing to touch programs, such as social security, its room for maneuver appears limited. “We should not expect great things from Musk’s role because American public spending accounts for less than a quarter of GDP and many are almost sacralized,” notes Bruno Cavalier. Chief economist of the management company Candriam, Anton Brender recalls that “Donald Trump had already promised during his previous election to reduce budgetary spending at the ‘moderate’ rate of 1% per year – his ‘penny plan’. He does not never did!” Health spending, which weighs heavily on the budget, could also be scrutinized by the one who dreamed of repealing Obamacare a few years ago. A point little developed during his campaign.
No stress
In reality, American debt has been on a slippery slope for several years. To the point of having led the Fitch rating agency to withdraw the United States from its precious triple A in August 2023, relegating the world power to AA +. As for the interest burden on the debt, it is close to $900 billion and continues to climb. Last July, the Chairman of the Federal Reserve, Jerome Powell, summed up the situation in these terms: “Our debt level is not unsustainable, but the path we are on is.”
Unsustainable? Not everyone is so alarmist. The disaster scenario of debt stress is not expected immediately. “A federal government debt crisis is far from certain. Its weight has increased from 30% of GDP at the start of the 2000s to almost 100% today… without the pressure on borrowing rates does not rise”, notes Florence Pisani, director of economic research at Candriam.
Samy Chaar, too, tempers fears. It focuses less on the extent of the debt than on the use made of it. “With Joe Biden already, the debt has increased, but for the benefit of investments, large infrastructure projects. If Trump increases the debt only for tax cuts, the situation could deteriorate. Unless he leads policies to improve the competitiveness of businesses and generate growth, which would be a good use of debt,” the economist explains.
Ultimately, the financial markets will be the arbiters of the economic policy pursued. “Excessive fiscal stimulation would make markets fear a reacceleration of inflation. They would anticipate rate hikes from the Federal Reserve: holding long-term Treasury securities would become less attractive. Long-term interest rates would rise… and the stock market would be weakened,” analyzes Florence Pisani.
The future belongs to those who moderate rates. It is not excluded that the president will be attentive to the reaction of the markets to adjust his policy. “We remember that Donald Trump does not like the stock market to fall. It is therefore perhaps the only booster which can calm his ardor on budgetary matters,” estimates Anton Brender. What if the scenario of a return of inflation is not confirmed? Christopher Dembik, economic advisor to the management company Pictet AM, considers the hypothesis. “A repeat of the 2016 scenario would result in a rise in long-term rates until the summer of 2025, but they could then fall, without however returning to pre-election levels.”
For the moment in any case, the market signals seem green. Wall Street applauded the announcement of the Republican’s victory, testifying to the optimism of investors, who remember his favorable economic record before the pandemic. “If at the same time as rates rise, corporate taxation is significantly reduced, the stock market will be able to hold up… for a while at least,” concludes Anton Brender.
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