The OBBBA increases the risks to US public finances
According to estimates by the Congressional Budget Office (CBO), between 2025 and 2034 the OBBBA will boost the public debt by USD 3.4 trillion (tn) compared to the CBO’s January 2025 estimates.
The bigger deficit mainly reflects the fact that the OBBBA makes permanent the tax cuts for families and businesses introduced during Trump’s first term and which were due to expire in 2026. Lower tax revenues of USD 4.5tn are only partially offset by USD 1.4tn worth of cuts in green energy tax credits and health care and welfare spending. In addition, increases in spending on defence and on fighting illegal immigration of USD 280 billion (bn) have been approved.
A scenario analysis of the US debt-to-GDP ratio
President Trump recently argued that thanks to the OBBBA and deregulation, US economic growth will be much higher than the CBO estimates, more than offsetting the impact of the recently passed tax cuts on the public finances.
A simple simulation partially supports this thesis. If nominal GDP growth rose to 6% annually over the next decade, the debt-to-GDP ratio would only rise to 127% in 2034 despite the increased deficit.
However, such a high growth rate may not be feasible. The Tax Foundation estimates that the OBBBA will raise nominal GDP by only 1.2% over ten years, equivalent to an increase in the annual growth rate of just 0.1%. This is partly because by extending the tax cuts that were implemented in Trump’s first term the OBBBA avoids the fiscal tightening that would have followed their expiry but does not add any new stimulus.
The actual fiscal boost to GDP growth compared to the current trend is small and mainly due to increased spending on defence and anti-immigration policies. Even anticipating the effects of the deregulation promoted by the current administration and of increased adoption of artificial intelligence, achieving a nominal GDP growth rate of 6% will be hard.
Furthermore, even if nominal GDP growth were to rise to 6% in the coming years, average Treasury bond yields would likely be higher than the 3.9% used by the CBO in its projections. Given a debt-to-GDP ratio of 124% at the end of 2024 and the larger deficit projected over the next decade, interest expenditure would increase significantly.
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