[Global Focus] Will Trump’s Tax Cuts Become a Time Bomb for the U.S. Economy? “The Real Issue Is Politics”

Even Within the Republican Party, Opposition Grows... Bill Stalled in the Senate
Trust in U.S. Treasuries Falters... "Deficit Has Surpassed a Critical Threshold"
"Solving the Debt Problem Depends on Trump's Political Will"

Concerns are mounting that the tax cut plan being pushed by U.S. President Donald Trump could drive the country’s fiscal deficit into an uncontrollable situation. Both the market and academia are warning that trust in U.S. Treasury bonds could be further shaken, and point out that the root of the issues surrounding worsening fiscal conditions and debt controversy lies in the political division triggered by the Republican Party.

Mounting Concerns Over Trump’s Tax Cuts: “Fanning the U.S. ‘Debt Bomb’”

On the 22nd of last month (local time), a key tax bill to implement President Trump’s large-scale tax cut pledge passed the U.S. House of Representatives. The bill extends major tax cuts that were enacted in 2017 and are set to expire at the end of this year, and includes a provision to raise the debt ceiling by $5 trillion. Republican leadership plans to pass this bill, which carries the label “One Big Beautiful,” in the Senate by July 4, U.S. Independence Day, and complete the legislative process with President Trump’s signature.

However, it remains uncertain whether the bill will pass the Senate. This is because there are growing concerns that, if enacted, the bill would sharply worsen the government fiscal deficit, which is already weighing on the U.S. economy. In a report released on the 4th, the Congressional Budget Office (CBO) estimated that if the bill is implemented as is, the U.S. fiscal deficit will increase by an additional $2.4 trillion (about 3,300 trillion won) over the next 10 years.

There are also voices of opposition within the Republican Party. Senator Rand Paul, an “orthodox conservative” who advocates for small government and sound fiscal policy, opposes the bill in part because it includes a provision to raise the debt ceiling. Senator Ron Johnson also called the bill “immoral.”

Elon Musk, CEO of Tesla, who was once called President Trump’s “first buddy” but has recently clashed with him, also criticized the tax cut bill on the social media platform X (formerly Twitter) on the 3rd, saying, “Sorry, but I can’t take it anymore. This absurd, waste-filled budget is disgusting and repulsive.” He added, “The tax cuts will cause a massive increase in the fiscal deficit and impose an unbearable debt burden on Americans.”

President Trump, seemingly conscious of such opposition, argued on Truth Social on the 4th that “the (federal) debt ceiling must be completely abolished to prevent economic disaster.” He also warned that failure to resolve the debt ceiling issue smoothly “could deal a terrible blow to the United States and the world.”

The U.S. Congress sets a “debt ceiling,” which limits the amount the government can borrow, as a safeguard for fiscal soundness. In this context, the Congressional Budget Office warned on the 9th that the federal government could face a default as the debt ceiling is expected to be exhausted between mid-August and the end of September.

Trust in U.S. Treasuries Shaken: “U.S. Fiscal Health Can No Longer Hold”

On the 22nd of last month (local time), Mike Johnson, Speaker of the U.S. House of Representatives and a member of the Republican Party, explained the "One Big Beautiful Bill," which contains key policies of U.S. President Donald Trump, at the federal Capitol in Washington DC. Photo by Getty Images Yonhap News

In the market, there is a growing sense of crisis that the U.S. fiscal deficit has surpassed a critical threshold and that trust in U.S. Treasuries, which has long supported fiscal capacity, could be further undermined. Peter Orszag, CEO of investment bank Lazard, said, “U.S. Treasuries have long been the most trusted asset for global investors, so there was no need to pay much attention to concerns about the U.S. deficit. Even when federal debt ceiling debates occasionally flared up, the market reacted indifferently.” He continued, “But this time is different. This year, the interest payments the country must make are projected to exceed the budgets for defense, Medicaid (health insurance for low-income people), and Medicare (health insurance for the elderly). In other words, more money will have to be spent just to pay interest than on major essential budgets.”

Orszag warned that the situation in which foreign investors, despite knowing the structural problems of U.S. finances, had little choice but to invest in U.S. Treasuries due to a lack of alternatives, may now be changing. He said, “Diplomatic relations with countries holding large amounts of U.S. Treasuries could change rapidly, and if some European countries such as Germany issue more bonds to invest additionally in defense and infrastructure, demand for U.S. Treasuries could decline.” He added, “Moody’s recent downgrade of U.S. Treasury bonds by one notch from the top rating can be understood in this context.”

In fact, the market has recently seen some major institutional investors reduce their holdings of U.S. Treasuries and switch to bonds from other countries. According to Bloomberg, insurance companies in Taiwan and Japan, as well as Australian pension funds, which had previously focused on buying U.S. Treasuries, are now selling them and buying Australian and Singaporean government bonds, both of which have AAA ratings. Countries that have maintained the highest credit ratings from the world’s three major rating agencies include Australia, Singapore, Denmark, Germany, Luxembourg, the Netherlands, Norway, and Switzerland. For “big player” investors seeking to avoid risks associated with declining trust in U.S. Treasuries, there are now plenty of viable alternatives.

Republican Party Ignores Reality: “Political Division Blocks Solutions”

AP Yonhap News

Experts unanimously agree that the root of the issues surrounding tax cuts, fiscal deterioration, and debt controversy lies in politics. Adam Tooze, a professor at Columbia University and a leading scholar of modern economic history, said, “The real problem now is politics. Even though the economy is functioning to some extent and the wealthy are doing well, the conservative party is moving to weaken government finances.” He continued, “This is by no means a normal situation. Because U.S. politics is failing to secure clear majority consent, fiscal policy lacks direction.”

Professor Tooze added, “The market is focused on the massive fiscal deficit that the Republican Party will create by refusing even to discuss expanding tax revenue. The problem became serious with the Republican tax cuts in 2017, which were implemented even though unemployment was historically low, causing the deficit to skyrocket.” He went on, “Historically, when surging debts during crises such as world wars were left unpaid and unmanaged, it ultimately led to revolutions or hyperinflation. The Trump administration is acting like Saddam Hussein, who distorted the course of war and denied defeat, in its handling of this issue.” He criticized the Trump administration for pushing ahead with tax cuts that could further deepen the fiscal crisis, calling it an attitude that ignores the “uncomfortable truth” facing the United States.

Paul Krugman, a professor at City University of New York and recipient of the 2008 Nobel Prize in Economics, also pointed out that political division in the United States is blocking solutions to the debt problem. He said, “It’s true that the current U.S. government debt is enormous, but in fact, managing this problem sustainably from an economic perspective is not difficult. The key is that it is extremely difficult to do so politically.” He explained, “This ‘political difficulty’ refers to the extreme division in U.S. politics. Even though extending the Trump administration’s tax cuts since 2017 would worsen the fiscal outlook, there are almost no Republican lawmakers who oppose it.”

Professor Krugman emphasized that resolving the U.S. debt issue depends on the political will of the Trump administration. He said, “As U.S. politics becomes more extreme and dysfunctional, it fails to perform its proper role. The radicalization of the Republican Party, which is more worrisome for the future of democracy than concerns over federal debt, is a more serious problem.” He continued, “House Republicans are even trying to cut the budget of the Internal Revenue Service (IRS), which means eliminating the means to prevent tax evasion by the wealthy. They claim to be concerned about the fiscal deficit on the surface, but at the same time, they are taking a contradictory stance by blocking tax collection.”