Conclusions:

1. The estimated reduction in federal spending sounds more impressive than it is.
2. The federal government’s interest expense is going to continue to rise.
3. Federal spending will continue to outpace tax receipts.

1. Cost Savings

The estimated cost savings from firing federal employees, cutting Medicaid, and slicing other programs are touted as running anywhere from $250 billion (low-end estimate from labor costs alone) to $1.2 to $2.0 trillion or more depending on what happens to Medicaid and other programs. That is a lot of zeroes! However, all these cost savings are estimated to accumulate over 10 years. The federal budget deficit for FY2024 alone was approximately $1.8 trillion. In other words, the plan is what we have seen numerous times before: Slow the rate at which the national debt will rise.

2. Rising Debt and Interest Expense

The national debt is going to rise. Therefore, the amount of interest to be paid will go up all else being equal. The annualized federal interest expense in 2024 was $1.124 trillion. By comparison, defense spending and investment was $1.111 trillion. We spend more on interest than we do on defense. Going back to the “all else being equal” premise, ITR Economics maintains that there is another extended period of inflation ahead of us, even if all the tariff hikes were rescinded.

We have discussed this in numerous webinars, presentations, and blogs. Higher inflation means higher interest rates. Rather than seeing the yield on Treasurys go down in the hope of covering the increasing debt, interest rates are likely to work their way higher as the mountain of debt grows. This unvirtuous trend requires more and more of the government’s “free cash” or income just to service the existing debt. That means, eventually, tax hikes and/or much more aggressive spending cuts than are being proposed.

3. Deficit Spending Is Probable

Running on a fiscal austerity platform is not likely to get a politician very far in our current culture. Indeed, over the course of 2025, we are likely to see tax cuts get extended. The Wharton school is estimating that the current Administration’s plans, if enacted as proposed, would add an additional $5.1 trillion to our national debt (also over the proverbial next 10 years).

A Cure?

As ITR Economics Consulting Principal Jackie Greene recently pointed out, it is possible to rectify these trends, but the timeline now is so short that the degree of fiscal responsibility needed to avoid the wall of debt we are rushing headlong into would itself create a severe economic contraction. Self-inflicted economic pain is a nonstarter in the political realm as it currently exists.