The hypothetical next term for Donald Trump already kindles debate, ranging from matters of birthright citizenship to the subject of Greenland. However, more than any other factor, the health of the nation’s economy will shape his stint in office. A trio of major economic hurdles awaits him, each one a relic of Joe Biden’s era, each one concerning fiscal policy.
Firstly, increasing spending by the federal government has led to it eating up more than 23% of America’s economic capacity — a sharp tilt from the sub-21% figure before the pandemic took the world by storm. Secondly, the end of the year could see an elevated burden of taxation unless the 2017 tax cuts are kept intact or at the very least, extended. Lastly, an expanding weight of government expenditure has spawned yearly deficits of $2 trillion and record-breaking levels of government debt.
A glimmer of hope is that the route to tackling these obstacles is through spending restraint, given the predicted average annual growth of revenue at 4.5% over the next few years. Achievable progress lies in a simple formula: ensure that the growth of spending is slower. If government spendings grow at a pace lesser than that of the private sector, the burden of the public sector will gradually diminish in comparison to the national economic output.
The primary challenge, however, lies in minimizing spending – a task easier said than done. The whims of special interest groups need to be subdued, and the Republicans will likely have to enforce a stringent freeze on domestic discretionary spending, conducting a series of cuts in the process. This is merely the inception.
Today’s federal spending primarily goes into entitlements ranging from Social Security and health programs to outlays for wealth redistribution. For Trump and his supporters to effectively curb the overall growth of the government, reforms in these domains are inescapable. However, Trump’s firm assertion that changes to the Social Security or Medicare will not be under consideration, puts enormous pressure on ensuing a serious crunch on entitlements like Medicaid and food stamps.
The likelihood of uproar from interest groups benefiting from the federal reserves in the wake of spending cuts is inevitability. Important questions arise: Will the Republicans, who bear barely-there majorities in Congress, disregard these criticisms and act for what they deem right? Will Trump, known for his liberal fiscal approach in his first tenure, pivot towards promoting responsible policy?
Under an optimistic lens, we can visualize Trump and the Republican party, hand in hand, maneuvering their way through spending bills that restrain the growth of government. Some lawmakers might vote for responsible policy fueled by their belief in the same, while others might do so out of the fear of stagnation, escalating debt, and the plausibility of an impending tax hike.
In stark contrast, a pessimistic outlook could suggest potential cold feet. The White House and congressional Republicans may delude themselves that too many citizens are highly dependent on the federal recalls, ultimately refusing to restrain spending. This approach would trigger an automatic increase in the spending burden.
Only through special budget rules might Trump and the GOP manage to avail a temporary prolonging of the 2017 tax cuts. Nevertheless, the convergence of tax relief and incessant growth in spending could thrust the yearly deficits from $2 trillion up to $3 trillion, while debt continues to set historical records.
Eventually, this passive approach would lead us into a fiscal crisis of enormous proportions, characterized by drastically rising interest rates and substantial fluctuations in financial markets. Given the enduring aftermath of lax monetary policies between 2020 and 2022, it seems improbable that the Federal Reserve can rescue Trump.
A pending hurdle has also been self-inflicted by Trump, through the imposition of high trade taxes hence brewing a fourth challenge. With this item on the list, the nation might find itself in a precarious situation.
The legacy of Joe Biden — an inflated governmental spending, burdensome tax increases, and untamed levels of government debt, seems to set a rocky path for Trump’s speculated second term. Only time can tell if the incumbent president and his Republican allies can successfully navigate through these multi-layered challenges in the field of economic and fiscal policy.