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New York: Celebrated historian Sir Niall Ferguson calls it “Ferguson’s Law” – a rule of thumb under which “any great power that spends more on debt servicing than on defence risks ceasing to be a great power”.
In a February paper for the Hoover Institution at Stanford University, where he is a senior fellow, Ferguson explained that in 2024, for the first time in nearly a century, the United States spent a bigger share of gross domestic product paying interest on its debt (3.1 per cent) than it did on defence (3 per cent).
And on present assumptions, the Congressional Budget Office (CBO) projects net interest payments will account for nearly double the defence budget by 2050.
President Donald Trump capped an extraordinary two weeks by winning Congressional passage of his “big beautiful bill”, which he will sign on Independence Day.Credit: AP
“This unpleasant fiscal arithmetic poses a clear and present danger not merely to the US economy, but also to the position of the United States as the world’s dominant military power,” Ferguson says.
“It must be a matter of urgent concern for American policymakers to restore an appropriate relationship between spending on debt service and spending on national security.”
Enter Donald Trump and his One Big Beautiful Bill. A grab bag of Trump’s policy priorities, the bill bounced its way through Congress this week to arrive at the president’s desk for signing on Friday, Independence Day (Saturday AEST), in a highly symbolic display of his sway over the Republican Party and indeed the country.
It caps an extraordinary two weeks in which Trump bombed Iran, dominated a NATO summit, shepherded a ceasefire between Israel and Iran, won a significant and highly consequential victory in the US Supreme Court, opened a detention centre nicknamed “Alligator Alcatraz” and, now, will ink his signature piece of legislation.
The One Big Beautiful Bill Act (OBBB), which is its official title, has at its centre the permanent extension of Trump’s 2017 tax cuts for individuals and businesses, which were due to expire at the end of this year.
According to the nonpartisan CBO, those tax cuts contribute the lion’s share to a total increase in the budget deficit of $US3.25 trillion ($4.95 trillion) over the next 10 years – $US3.94 trillion including interest.
The libertarian Cato Institute think tank, which advocates limited government, said that under what it called “realistic assumptions” about economic growth, extensions of tax giveaways or delays to spending reform, the bill could actually add more than $US6 trillion to the national debt.
Big, beautiful, bonkers?
“The debt burdens in this bill are unwelcome and dangerous,” says Judge Block, a senior fellow at the New York-based Manhattan Institute, a conservative think tank. “It’s one of the more expensive pieces of legislation in modern memory.”
The Trump administration, and many Republicans, see it differently. In their view, the bill actually reduces debt as it contains savings measures while mostly rolling over existing tax policy. Otherwise, Americans would be hit with an enormous tax increase. The CBO, on the other hand, bases its calculations off existing law, under which taxes revert to their pre-2017 levels.
Block said Republicans could largely justify the 2017 Trump tax cuts because they were paired with significant simplifications of the tax code. That is not the case this time, he said, though there were positive aspects to the OBBB, such as immediate tax write-offs for research and development.
“To a large extent, most of the debt here is coming from giveaways such as the overtime credit, the tax on tips deduction,” he said. “Those can’t really be justified as tax simplification or a means toward economic growth, which makes their deficit-increasing aspect all the more worrying.”
House Republicans join Speaker Mike Johnson to celebrate signing Trump’s bill.Credit: AP
Introducing tax deductions for tips and overtime was a major Trump election promise, one he advertised with much fanfare in cities such as Las Vegas. There’s a major catch, though: the policy expires at the end of 2028, when Trump leaves office.
As Block points out, there are fairly substantial spending cuts in the bill, which Republicans have not always dared reach for in the past. The biggest is a record $US1 trillion cut to Medicaid, which provides health coverage for low-income adults and families. The CBO estimates this will lead to 11.8 million more people living without health insurance by 2034.
The White House maintains there are no “cuts” to Medicaid in the OBBB. Rather, it says the savings come from removing illegal aliens from the program, enforcing work requirements and protecting Medicaid “for the truly vulnerable”.
Medicaid was a focus of a record-breaking speech by the Democrats’ leader in the House of Representatives, Hakeem Jeffries, who began before dawn on Thursday local time and spoke for nearly nine hours. Languishing without the numbers in either chamber of Congress, and with Trump stamping his authority on every aspect of American life, the listless Democratic Party was hoping to send a signal to angry voters, even if it was only able to delay the inevitable, with the OBBB passing quickly after Jeffries finally sat down.
“[Seventeen] million people just lost healthcare,” posted the Democratic governor of California, Gavin Newsom, within minutes of the bill’s passage. “[Eighteen] million kids just lost school meals. Three million Americans just lost food assistance. And $US3.5 trillion was added to the deficit. All for a tax cut for Trump’s billionaire donors.”
Newsom called it “the ultimate betrayal”.
American debt interest payments now exceed money spent on defence.Credit: AP
In New York, young hedge fund manager Spencer Hakimian was also aghast. The 26-year-old, who has built an online following of 150,000 criticising Trump over tariffs, said history had shown debt accumulation is the ruin of empires.
“You can’t keep adding debt with no limit. Both parties are wrong about this, it’s a complete fallacy,” he said.
And it was facetious for the administration to argue that the tax cuts didn’t really contribute to debt, Hakimian said. The bill lifts the debt ceiling by another $US5 trillion. “Why would they be raising the debt limit if they weren’t adding to the debt?”
The feeling on Wall Street is mixed, Hakimian says, but most people are agnostic. Markets are already at all-time highs, with the US economy defying expectations, unemployment staying low and Trump’s tariff threats largely petering out.
That matches the assessment of The Economist’s British editor-in-chief Zanny Minton Beddoes, who said the mood among New York financiers at the Aspen Ideas Festival was insouciant, and ambivalent about the debt.
“Call me a European grinch, but I felt I had arrived on planet Pangloss,” she told subscribers in a note after the “big, beautiful, bonkers” bill passed. “I worry that Trumponomics 2.0 is eroding the foundations of America’s economy in more fundamental ways than many people are willing to admit.”
A trader works on the floor of the New York Stock Exchange on Tuesday.Credit: AP
Ticking time bomb
Steven Hamilton, an Australian assistant professor of economics at George Washington University, says the debate over how to measure the One Big Beautiful Bill’s impact on debt is moot. The point, he says, is that it presumes current policy can go on forever, and “letting current policy go on forever is nuts”.
“Within 10 years, US debt to GDP will be approaching 130 per cent, which is well above any time in US history, well above World War II and beyond the level anyone really thinks is sustainable,” Hamilton says.
“That’s with the debt we have, and what we’re planning to do is increase debt by another 25 per cent over the next 10 years. What we actually needed from the bill is a serious fiscal consolidation effort.”
Likewise, Block says the bill’s savings measures effectively concede Congress is not going to approve any such consolidation, and will simply leave the “dire” state of US debt in place.
Many analysts believe a sovereign debt crisis is a matter of when, not if. About a month ago, JPMorgan Chase chief executive Jamie Dimon said a crack in the bond market was “going to happen”.
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Hamilton believes it is coming sooner rather than later. “At some point in the next 10 years, there is going to be a reckoning where the music stops and the markets say, ‘well, we’re not going to fund this any more’,” he says. “You cannot keep going along this pathway.”
A devaluing of US debt would have dire consequences for the global financial market and for Australia that would eclipse, by far, the 2008 Global Financial Crisis.
Even if such a collapse doesn’t happen on its own, says Hamilton, the US debt burden leaves it in a precarious position to deal with a crisis, such as a future pandemic, war with China, or some sort of crisis arising from the advent of artificial intelligence technology.
“There are all sorts of things we don’t know,” he says. “We’re exposing ourselves to enormous risk.”
Much of that risk depends on what happens to interest rates in coming years. Low rates between the GFC and the COVID-19 pandemic made US debt more affordable. That era is now over.
Trump has been badgering Federal Reserve chair Jerome Powell for months to lower interest rates, saying it is costing the US government hundreds of billions of dollars a year in interest payments on its debt.
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But it is the long-term trajectory that matters, and Block says the consequences could be disastrous. “If those interest rates continue to go up, that could be by far the most drastic threat to the American economy and America writ large,” he says.
More than the threat posed by Russia or China? “I don’t think that’s an exaggeration.”
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