Donald Trump is pursuing a significant expansion of government borrowing with his One Big Beautiful Bill Act.
But with long-term bond yields rising, and Section 899 potentially making the US a less attractive place to invest, investor appetite to finance the US budget deficit may be waning.
Paul and Luke discuss the size of the deficit increase, whether tariff revenue can offset tax cuts and what Elon Musk leaving DOGE may mean for fiscal policy.
Some highlights:
- Big bill, big numbers. The One Big Beautiful Bill Act (OBBBA) would make Trump’s first-term tax cuts permanent, introduce new tax breaks and cut spending on Medicaid and clean energy — while boosting funding for border enforcement. The result – an extra US$2-US$3trillion in debt within 10 years.
- Tariff uncertainty. Tariffs are meant to help pay for the bill but legal challenges to Trump’s use of emergency powers have cast doubt on their durability. Even if upheld, a chunk of tariff revenue may be redirected to subsidise affected industries, limiting its fiscal impact.
- Musk exit. Elon Musk’s departure from the Department of Government Efficiency (DOGE) underscores the limits of federal cost-cutting efforts. While DOGE did reduce headcount and trim some agencies, its broader impact was muted. With Musk gone, even that momentum may fade.
- Bond markets react. Long-term government bond yields are rising, and not just in the US. That’s partly due to higher bond issuance but it also reflects growing investor concerns about the fiscal health of governments in other developed markets.
- Section 899. A clause within the OBBBA could allow the US to impose withholding taxes on non-residents' earnings profits in the US. If enacted, it could reshape global corporate taxation and make the US a less attractive place to invest.
Listen to the latest episode of our Macro Bytes podcast for the full discussion.