RPT-BREAKINGVIEWS-Congress tax plan deepens hard-to-fill budget hole

By Gabriel Rubin

WASHINGTON, May 19 (Reuters Breakingviews) - Budget gimmicks that grease legislative negotiations don’t work on investors in U.S. government debt. Republicans in Congress are inching towards a deficit-busting $4.5 trillion tax cut bill. If passed, it would add almost $4 trillion to the U.S. debt pile of $36 trillion over the next decade, according to the Joint Committee on Taxation.

That additional borrowing comes at an inopportune time: President Donald Trump’s restrictive and rudderless trade policy has raised expectations for inflation in the year ahead above 7%, according to the University of Michigan. As yields on 30-year U.S. Treasuries US30YT=RR once again hover around 5%, bond markets are sending a message to Republicans: if you mess this up, we don’t trust that you’re going to be able to fix it quickly.

To at least partially pay for the tax cuts, benefits and Democratic spending priorities are on the chopping block. The legislation is deeply regressive: factoring in the loss of federal assistance, Americans making between $17,000 and $51,000 could lose about $700 on average in after-tax income. Meanwhile, those with incomes over $4.3 million would gain more than $389,000 after tax starting next year, according to the Penn Wharton School. The Congressional Budget Office projects at least 8.6 million people would lose health insurance under the law.

Republican leaders promise that extra growth will make up for budget shortfalls. However, the bill goes after tax credits designed to stimulate new green energy industries. Squeezing lower-income Americans is also counterproductive. Spending on Medicaid and nutrition, for example, create more than a dollar of economic activity for every dollar handed out. By contrast, high-income taxpayers are more likely to save their windfalls.

Muted growth prospects and higher sovereign debt prompted Moody’s to strip the U.S. of its last remaining triple-A credit rating on Friday. The risk premium attached to U.S. government debt is showing up in long-term government bond yields, which are once again at levels they last reached during the market turmoil sparked by Trump’s tariffs in early April.

Still, it’s not too late to change course. There are deep divisions in the Republican caucus, and with a slim majority over Democrats, any bloc in either the House of Representatives or Senate could hold the bill hostage to extract concessions. If it passes, however, there will be no going back. Unlike the United Kingdom, which quickly dumped Prime Minister Liz Truss after her 2022 budget led to a bond market revolt, the U.S. lacks a political escape hatch when markets reject bad policy. A tax bill passed in 2025 will fix the U.S. fiscal course at least until a new Congress and president can be elected in 2026 and 2028, respectively. The costs of profligacy are only getting higher.

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CONTEXT NEWS

The U.S. House Budget Committee narrowly voted to advance a tax and spending package on May 18 after hardline conservatives continued to press for deeper spending cuts in closed-door talks with Republican leaders and White House officials. Nonpartisan analysts say the bill would add $3 trillion to $5 trillion to the nation's debt over the next decade.

Treasury yields rose on Monday and the dollar fell due to concerns about U.S. debt and rising deficits after Moody’s downgraded its sovereign credit rating late on May 16, stripping the U.S. of its final triple-A credit rating. The yield on the 10-year note rose above 4.56% in early trading, while the 30-year bond rose above 5%.