Tax Bill Passes, Averting Debt Default, While $3.4 Trillion Deficit Surge Looms Like a Time Bomb

TradingKey - On Thursday afternoon Eastern Time, the U.S. House of Representatives narrowly passed a tax cut bill championed by President Trump with a vote of 218 to 214, successfully averting a potential debt default crisis.

Earlier in June, the Congressional Budget Office (CBO) warned that without a change in the debt ceiling, the U.S. government's ability to borrow using extraordinary measures could be exhausted between mid-August and late September, at which point a default date would be imminent.

The passage of the tax cut bill raises the U.S. government's debt ceiling by $5 trillion from the current $36.1 trillion, temporarily alleviating market concerns over a U.S. debt default and granting the government more time to address fiscal issues.

However, according to the CBO, the legislation is projected to increase the U.S. deficit by $3.4 trillion over the next decade. Analysts have pointed out that this bill is viewed as negative news for the U.S. Treasury market and America's fiscal health.

Trump Claims Tariff Revenue Can Offset Bill Costs; Economists Argue Costs Will Exceed Revenue

The Trump administration asserts that tax cuts and deregulation will stimulate economic growth, and along with tariff revenue, help offset the bill's costs.

The White House Council of Economic Advisers indicated that the bill's tax cuts could increase inflation-adjusted GDP by 4.2% to 5.2% within four years. Campe Goodman, a fixed-income portfolio manager at Wellington Management, anticipates that the bill will boost the 2026 economic growth rate by 0.5%.

Regarding tariff revenue, the White House projects tariffs to generate approximately $6 trillion to $7 trillion over 10 years, with Treasury Secretary Besent estimating annual revenue of $300 billion to $600 billion.

However, most economists predict that tariff revenue will fall far short of offsetting the revenue loss caused by the bill over the next decade. The CBO estimates that the tariffs implemented by the Trump administration as of May 13 will reduce the budget deficit by just $2.8 trillion in the decade leading up to 2035.

In a report released this January, the CBO predicted that by 2035, due to mandatory spending and interest costs outpacing revenue growth, debt will balloon significantly, with federal debt held by the public rising to 118% of GDP, surpassing the historical high of 106% of GDP in 1946.

Heightened Market Concerns: Increased U.S. Debt Supply and Reduced Demand

BlackRock has warned that foreign buyers are beginning to shun U.S. debt. This declining demand for the $500 billion in bonds issued weekly by the U.S. could further raise borrowing costs, posing a genuine risk. BlackRock emphasized that if the unstable state of U.S. government debt is not controlled, it represents the greatest risk to the U.S. in financial markets.

Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, noted that rising long-term Treasury yields might diminish the relative attractiveness of many fixed-income investments.

After the bill's passage, the market responded swiftly. As of now, the 10-year Treasury note surged to its highest level in over a week at 4.382%, while the 2-year Treasury yield climbed to 3.915%, partly due to investor concerns over increasing fiscal deficits and debt.