From TaxVox: Trump’s tax and spending plan could sharply raise interest rates

June 21, 2016

Donald Trump’s tax and spending plan could nearly triple interest rates and increase the federal government’s debt by $14 trillion by 2026, according to an estimate by Mark Zandi and his colleagues at Moody’s Analytics. In 2018, the federal government could be paying more than $900 billion in interest—nearly twice what it pays today. By 2026, it could be paying more than $1.8 trillion in debt service, 50 percent more than under current fiscal policy.

Zandi primarily looked at the effects of Trump’s plan on the overall economy. And it would be bad: his economic policy would throw the country into a recession by early 2018 and dampen growth over the next decade. But let’s just focus on what it could mean for interest rates and the federal debt.

The heart of Trump’s plan is his rewrite of the federal tax code. In December, the Tax Policy Center estimated his proposal would reduce federal revenues by $9.5 trillion over 10 years, and by nearly $1.2 trillion in 2026 alone. TPC assumed that, if not offset by spending cuts, Trump’s plan would add $1.7 trillion in interest costs over the decade—$385 billion in 2026—assuming no change in interest rates. So far, Trump has not specified spending reductions beyond his promises to cut “waste, fraud, and abuse” eliminate a few modest federal programs, and cap the federal share of Medicaid.

Zandi and his colleagues looked at Trump's tax and spending plans, as well as his proposed immigration and trade policies. They assumed Congress would reduce planned spending by about $1.5 trillion over 10 years. Still, the Trump plan would result in a big bump in borrowing. And Zandi found those higher deficits would drive up rates significantly. 

Tax Policy Center - Donald Trump and interest rates

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