The fiscal implications of Trump's Big Beautiful Bill

The passage of the so-called “Big Beautiful Bill” will, by itself, boost growth over the medium term. However, offsetting the extent of any boost will be ever-changing tariff policies. Tariffs are a de facto tax on consumers and businesses, and therefore contractionary. In addition to the contractionary impact of any cuts to federal spending—as Congress wrestles with implementing DOGE-recommended cuts—investors will carefully monitor the net effect of these clashing policies.

As fiscal policymakers grapple with the complexities of debt sustainability, they find themselves on a precarious path. The newly enacted tax bill should be expansionary, stimulating economic growth in the medium term. However, this positive effect may be overshadowed by the combined impact of tariffs—essentially acting as a tax hike—and significant cuts to federal grants and other spending.

Tariffs increase the cost of goods, reducing consumer purchasing power and potentially dampening overall economic activity. Meanwhile, should Congress enact any proposed DOGE spending cuts, reductions in federal grants (and other spending) would further constrain growth. While these measures aim to narrow the budget deficit gradually, they risk creating a paradox. As deficit levels decline, growth could slow down, exacerbating the fiscal challenges policymakers seek to mitigate.

In this delicate balancing act, it is crucial for policymakers to assess the implications of their decisions carefully. A sharp slowdown in growth could inadvertently worsen the already elevated budget deficits, leading to a cycle of economic stagnation.

The importance of prioritizing long-term stability over short-term gains cannot be overstated. If fiscal sustainability concerns persist, there may be limited relief from borrowing costs – even if the Federal Reserve starts reducing rates – preventing policymakers from fostering an environment conducive to economic growth and prosperity. The U.S’s growth outlook is dependent on the administration’s ability to successfully navigate the difficult fiscal path.