GOP Tax Cuts: How Rising U.S. Debt Could Hike Consumer Borrowing Costs
Table of Contents
- GOP Tax Cuts: How Rising U.S. Debt Could Hike Consumer Borrowing Costs
- The Looming Debt Crisis: A Breakdown
- How Rising Debt impacts Treasury Yields
- Debt’s Ripple Effect on Consumer Borrowing
- Impact on Bond Investors
- ‘Pouring Gasoline on the Fire’
- Evergreen Insights: Understanding U.S. Debt and Fiscal Policy
- Frequently Asked Questions About National Debt and Interest Rates
- What are the potential long-term consequences of a high national debt?
- How do changes in the Federal Reserve’s monetary policy affect interest rates?
- What role do international investors play in the U.S. debt market?
- How does the debt-to-GDP ratio impact the economy?
- What measures can be taken to reduce the national debt?
A sweeping package of tax cuts passed by House Republicans in May is projected to add trillions to the U.S. debt,potentially raising interest rates for consumers. As the Senate begins its review, economists warn that increased borrowing costs could impact everything from mortgages to auto loans, making affordability a growing concern. The Committee for a Responsible Federal Budget estimates the bill could add $3.1 trillion to the national debt over a decade, while the Penn Wharton Budget Model projects an even higher figure of $3.8 trillion.
The Looming Debt Crisis: A Breakdown
The Congressional Budget Office (CBO) projects that, under current law, the federal debt will reach unprecedented levels relative to the size of the economy. By 2034,the debt held by the public is projected to reach 116 percent of GDP,far exceeding the historical average according to recent CBO data.
Representative Thomas Massie of Kentucky, one of only two Republicans to vote against the House measure, described it as a “debt bomb ticking,” highlighting the near-term increase in deficits.
Did You No? The U.S. national debt currently exceeds $34 trillion, or roughly $100,000 per citizen.
How Rising Debt impacts Treasury Yields
Consumer borrowing costs, such as those for mortgages and auto loans, are often linked to U.S. Treasury bond yields, particularly the 10-year Treasury. These yields are primarily determined by market forces, fluctuating based on investor supply and demand.
The U.S. government relies on Treasury bonds to finance its operations due to an ongoing budget deficit. To attract investors, the government pays interest on these bonds.
If the Republican bill,known as the “One Big Lovely Bill Act,” substantially increases the U.S. debt and deficit, investor confidence could decline, reducing demand for Treasury bonds, economists caution.
Investors may then demand higher interest rates to offset the perceived risk of the U.S. government defaulting on its debt obligations.
Pro Tip: Keep an eye on the 10-year Treasury yield as a key indicator of potential shifts in consumer borrowing rates.
Philip Chao, chief investment officer and certified financial planner at Experiential Wealth, notes that higher risk necessitates higher interest rates on the 10-year treasury.
Moody’s downgraded the U.S.’ sovereign credit rating in May 2025, citing the growing federal budget deficit, which led to a spike in bond yields.
Debt’s Ripple Effect on Consumer Borrowing
Mark Zandi, chief economist at Moody’s Analytics, suggests that for every 1-point increase in the debt-to-GDP ratio, the 10-year Treasury yield rises by approximately 0.02 percentage points.
as a notable example, if the debt-to-GDP ratio were to climb from 100% to 130%, the 10-year Treasury yield could increase by about 0.6 percentage points, pushing the yield above 5% from its current level of around 4.5%, Zandi explains.
A fixed 30-year mortgage could then rise from nearly 7% to roughly 7.6%, potentially making homeownership less accessible, especially for first-time buyers.
Kent Smetters, an economist and faculty director for the Penn Wharton Budget Model, estimates that the debt-to-GDP ratio would surge from about 101% at the end of 2025 to an estimated 148% by 2034 under the House legislation.
Impact on Bond Investors
Rising Treasury yields can also negatively impact current bondholders, as their existing Treasury bonds become less valuable, affecting investment portfolios.
Chao points out that when market interest rates increase, bond values decrease, reducing net worth.
The long-term Treasury bond market has experienced increased volatility due to investor concerns, prompting some experts to recommend shorter-term bonds.
Conversely, new bond buyers may benefit from the higher rates, Chao adds.
‘Pouring Gasoline on the Fire’
John Quinlan, Senior Economist at Wells Fargo, notes that consumer financing costs have roughly doubled in recent years.
The average 10-year Treasury yield was approximately 2.1% from 2012 to 2022, compared to about 4.1% from 2023 to the present, Quinlan states.
While the U.S. debt burden is just one factor influencing Treasury investors and yields, Quinlan suggests that financial markets have become increasingly concerned about debt levels in recent years.
Even without the Republican legislation,the U.S. debt burden is projected to increase, with the debt-to-GDP ratio rising to 138%, according to Smetters.
Chao argues that the House legislation would exacerbate the existing problems,”pouring gasoline on the fire.”
He concludes, “It’s adding to the problems we already have, and this is why the bond market is not happy with it.”
| Metric | Current | Projected (with House Bill) | Projected (without House Bill) |
|---|---|---|---|
| Debt-to-GDP Ratio (2025) | 101% | N/A | N/A |
| Debt-to-GDP Ratio (2034) | N/A | 148% | 138% |
| Potential Increase in 10-Year Treasury Yield | N/A | 0.6% | N/A |
Evergreen Insights: Understanding U.S. Debt and Fiscal Policy
The U.S. national debt is the total amount of money owed by the federal government to its creditors. It accumulates over time as the government spends more than it collects in revenue,resulting in budget deficits. The debt is held in various forms, including Treasury securities purchased by individuals, corporations, and foreign governments.
Fiscal policy, which includes government spending and taxation, plays a crucial role in managing the national debt. Tax cuts and increased government spending can stimulate economic growth but also contribute to larger deficits and higher debt levels. Conversely, tax increases and spending cuts can reduce the debt but may also slow down economic growth.
Historically, the U.S. debt has fluctuated in response to economic conditions,wars,and policy changes. Periods of high debt have often been followed by efforts to reduce deficits and stabilize the debt-to-GDP ratio. However, long-term challenges such as an aging population and rising healthcare costs continue to put pressure on the federal budget.
Frequently Asked Questions About National Debt and Interest Rates
What are the potential long-term consequences of a high national debt?
A high national debt can lead to several negative consequences, including higher interest rates, reduced investment, and increased risk of financial instability. It can also limit the government’s ability to respond to economic crises and invest in essential programs.
How do changes in the Federal Reserve’s monetary policy affect interest rates?
The Federal Reserve’s monetary policy, particularly its control over the federal funds rate, can significantly influence interest rates throughout the economy. Lowering the federal funds rate can stimulate borrowing and investment, while raising it can help control inflation.
What role do international investors play in the U.S. debt market?
International investors hold a significant portion of U.S. debt, and their demand for Treasury securities can influence interest rates. Changes in global economic conditions and investor sentiment can affect this demand,leading to fluctuations in Treasury yields.
How does the debt-to-GDP ratio impact the economy?
The debt-to-GDP ratio is a key indicator of a country’s ability to repay its debt. A high ratio can signal financial stress and increase the risk of default, potentially leading to higher borrowing costs and reduced economic growth.
What measures can be taken to reduce the national debt?
Reducing the national debt requires a combination of fiscal policies,including tax increases,spending cuts,and economic growth initiatives. These measures can help increase government revenue and reduce expenditures, leading to a more lasting fiscal path.
What are yoru thoughts on the potential impact of rising debt on consumer borrowing? How should policymakers address the growing national debt?
Disclaimer: This article provides general facts and should not be considered financial advice. Consult with a qualified financial advisor before making any investment decisions.
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