The Republican reconciliation bill that narrowly passed the House on Thursday promises to add to the U.S.’s swelling deficit, which one economist warns could raise borrowing costs and wreak havoc on the economy at large.
“The biggest fault of the bill that has passed the House is its total disregard of the very dangerous fiscal position of the United States,” economist Richard Portes told Newsweek.
“The ‘safety’ of U.S. Treasuries is threatened,” he added. “There is a serious risk of a bond market crisis that could lead to a wider financial crisis, with repercussions throughout the world. We can only hope that some Republican senators will be more responsible than their colleagues in the House.”
Newsweek has contacted the Treasury Department and the Republican National Committee for comment via email and contact form, respectively.
Why It Matters
Treasury bond yields—the interest the government pays to borrow money—have been rising over the past few years as the U.S.’s national debt and deficit have continued to balloon. Both 10-year and 30-year yields are hovering at levels not seen since the 2008 financial crisis. As Treasury yields serve as a benchmark for borrowing costs throughout the wider economy, the ripple effects can be felt in everything from mortgage rates to credit card loans.
Should these interest costs outpace economic growth, this could render the U.S. unable to pay off its debt faster than it increases, requiring the government to borrow more to cover existing obligations and pushing the country into what economists refer to as a “debt spiral.”
What To Know
On Thursday, the Republican-controlled House of Representatives approved President Donald Trump‘s sweeping tax bill by a vote of 215 to 214.
Alongside cuts to Medicaid and the Supplemental Nutrition Assistance Program, the bill includes an extension of Trump’s 2017 tax cuts, further tax breaks promised on the campaign trail and a $4 trillion hike to the nation’s debt ceiling.
According to analysis from the Congressional Budget Office, the tax provisions and new spending outlined in the bill would raise the U.S.’s deficit by almost $3.8 trillion over the next 10 years. The potential increase to the country’s $36.2 trillion deficit was the primary source of opposition from certain House Republicans.
The two GOP holdouts—Representatives Thomas Massie of Kentucky and Warren Davidson of Ohio—both cited this in their decision to vote no on Thursday.
Bond markets were rocked after the vote, with the yield on 10-year Treasury bonds rising above 4.6 percent and those on 30-year bonds surpassing 5.1 percent, the highest level since October 2023, per CNN.
Prior to the vote, the U.S. government auctioned off $16 billion of its 20-year bonds on Wednesday, which economists told Reuters had seen weak demand and signaled growing fears about the U.S.’s fiscal difficulties.
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The fiscal threats posed by the U.S.’s ballooning debt and deficit had already prompted rating agency Moody’s to downgrade the country’s credit rating from a perfect “Aaa” to “Aa1.”
“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s wrote in its May 16 assessment. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
“If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade,” it added.
Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, recently told Newsweek that the deficit and the resultant downgrade in the U.S.’s credit rating would weaken the economy “by pushing up inflation and interest rates and slowing growth.” She added that it would also make the country “less prepared for emergencies in case we need to borrow more.”
What People Are Saying
Professor Richard Portes, an economist at the London Business School, told Newsweek: “Deficits and debt are already high, and all independent estimates project rapidly increasing debt as far as the economist’s eye can see. The U.S. government bond markets are already shaky, long-term interest rates are rising, and it seems that foreign investors are fleeing the United States.”
Nicholas Creel, an associate professor of business law at Georgia College and State University, wrote in a Newsweek op-ed: “The softening demand for American debt is spiking borrowing rates and sending stocks into a tailspin. This isn’t something that we should cast off as just another bad day on Wall Street—it’s a glaring red flag about the sustainability of America’s fiscal trajectory.”
Lawrence Gillum, the chief fixed income strategist for the wealth management firm LPL Financial, wrote in a blog published on Thursday: “The idea of the United States losing its ‘exceptionalism’—particularly in relation to U.S. Treasuries as a global safe-haven asset—has been discussed in various forms for decades—since the era of bell-bottom pants and Atari game consoles. Each past episode questioned Treasuries’ haven-status, yet their status persisted due to unmatched market depth, dollar centrality, and geopolitical clout. But perhaps the biggest rebuttal against Treasury securities losing their haven status is, frankly, that there are no better alternatives (for now?). There are no guarantees that that status can’t change, but we would argue that is something that would take place over decades and not days.”
White House press secretary Karoline Leavitt, in response to concerns about the deficit-increasing effects of the bill, told reporters on Monday: “This bill does not add to the deficit. In fact, according to the Council of Economic Advisers, this bill will save $1.6 trillion. And the president absolutely understands and hears the concerns of fiscal conservatives and of Americans who want to get our fiscal house in order. That’s what the intention of this bill is.”
Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, recently told Newsweek: “We are now at the point with interest payments larger than spending on national defense, that it makes us highly vulnerable in terms of geopolitics and national security. Unfortunately, it is not an exaggeration to say that over time it will undermine our role as a superpower, as it has to other countries in the past.”
President Donald Trump wrote on Truth Social after the bill passed: “Great job by Speaker Mike Johnson, and the House Leadership, and thank you to every Republican who voted YES on this Historic Bill! Now, it’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE! There is no time to waste.”
What Happens Next
The tax bill now heads to the Senate, where opposition from fiscal hawks is likely to be at least as pronounced as in the House.
“There’s nothing fiscally conservative about expanding the debt ceiling more than we’ve ever done it before,” Senator Rand Paul of Kentucky told reporters on Thursday, adding that he would support the package if a separate vote on increasing the debt ceiling were held.