Horizon 2025 | US fiscal situation: debt, deficit and market outlook

Today, it is unlikely that meaningful US debt reduction will occur in the near future due to expansionary fiscal policy, a focus on industrial policy and deepening political polarisation. The Trump administration is on track to expand the budget deficit by more than USD 3 trillion in the coming decade as a result of the OBBBA, which extends expiring tax cuts, creates new ones and cuts spending on Medicaid, nutrition assistance, and some other discretionary spending. The cost could rise to close to USD 4 trillion, including interest expenses, and may approach close to USD 5.5 trillion if the temporary tax cuts were made permanent.

In a best-case scenario, tariff revenues could offset the expansion of the deficit from the bill. Under most reasonable estimates, the deficit would rise to around 7 percent of GDP, further adding to the country’s debt burden. Elon Musk’s so-called Department of Government Efficiency (DOGE) fell spectacularly short of its cost reduction targets, highlighting the difficulty in cutting government spending.

Rising debt and deficits imply rising Treasury issuance. What’s more, this is now happening against a backdrop of a tectonic shift underway in the global economy. The existing geoeconomic architecture – in which the US delivers financial stability, security guarantees and superior returns in exchange for foreign capital – is faltering as US policies undermine trust in the world’s largest economy.

Deficit impact from One Big Beautiful Bill Act by year
USD billion Congressional Budget Office’s estimates

There are serious concerns about who will buy this massive issuance of Treasuries and at what price. Any shift in the global currency order away from the dollar, or de-dollarisation, is unlikely to become reality in the near future though it may persist as part of a longer-term trend. No single currency or currency basket currently present a viable alternative.

However, recent action from the Trump administration raises the risk of a return of the bond vigilantes. We may see a scenario similar to the so-called “Liz Truss moment” in the UK, where market forces demand a higher yield for holding government debt as a result of fiscal policy initiated – then abandoned – by the former British prime minister. The ongoing accumulation of debt threatens to exhaust the patience of price-insensitive buyers, which could trigger a rapid decline in market sentiment. The likelihood of this risk will only increase as long as the pace of debt accumulation continues.

An adverse scenario cannot be ruled out in which persistent worries from investors about the fiscal outlook push borrowing costs sharply higher and cause significant financial stress. The Fed could be forced to intervene with quantitative easing. Some have even suggested the possibility of yield curve control, which the US experimented during and after World War II when the Treasury needed help financing wartime expenditures. A major risk associated with this is the central bank’s credibility, especially in an environment of higher inflation and inflation volatility.