On July 4th, President Trump signed the “Beautiful Bill,” which raises the debt ceiling, increases the deficit, and legalizes “Trump Economics.” What economic effects will this bill have, and will it trigger another “U.S. Debt Panic”?
Bill Content: Total Deficit of $4.1 Trillion, Mainly a Continuation of Existing Policies
The “Beautiful Bill” takes effect, and “Trump Economics” is fully legalized for the first time. On July 4th, Trump signed the “Beautiful Bill,” which is the first legislation to fully legalize and institutionalize “Trump Economics.” The 2018 “Tax Cuts and Jobs Act” primarily focused on tax cuts, while the “Beautiful Bill” includes five major pillars: tax cuts, welfare reductions, strengthening defense, deporting immigrants, and developing traditional energy. The bill’s overall deficit size is $4.1 trillion, with $700 billion in interest payments and a primary deficit of $3.4 trillion. Measured as a percentage of nominal GDP, the bill’s scale is second only to the 1981 Reagan tax cuts. However, of the tax cuts, about 83% are extensions of existing TCJA cuts, and only 17% are new cuts.
Trump also demonstrated stronger control over the Republican Party during the bill’s formulation. In terms of power structure, the bill re-adjusts the balance of financial power between the federal and local governments, requiring local governments to shoulder more expenses for Medicaid, food stamps, and other welfare programs, while the federal government increases its regulatory powers and strengthens oversight. Legally, it expands the president’s powers, particularly in areas like Social Security, infrastructure permits, and immigration enforcement.
The “Beautiful Bill” consists of 11 major sections: expanding tax cuts, increasing defense spending, increasing immigration enforcement spending, reducing welfare and healthcare spending, and cutting subsidies in areas like new energy. Tax cuts are the core component of the bill, including three parts: 1) extending the original TCJA tax cuts worth $3.9 trillion; 2) adding new personal tax cuts worth $400 billion; and 3) adding new corporate tax cuts worth $1.1 trillion. The Senate version increases corporate tax cuts, making permanent deductions for R&D expenditures, accelerated depreciation, and interest deductions. For individuals, the tax cuts continue to favor the wealthy, reducing tax breaks for middle and low-income groups. Tips and overtime income exemptions are given time limits, and the child tax credit is reduced.
In terms of expenditures, the bill significantly increases fiscal spending on defense and immigration enforcement. Defense spending is increased by $150 billion, with key funding allocated for the construction of naval vessels ($28 billion) and missile defense systems ($31 billion). Immigration and border security spending is increased by $174 billion, reaching a historical high, with key allocations for $50 billion for the border wall and $45 billion for illegal immigrant detention facilities. According to estimates by the U.S. Immigration Commission, the annual cost of deporting 1 million illegal immigrants is approximately $92.2 billion, with an average cost of $92,000 per deportee. Additionally, $65 billion is allocated for agricultural subsidies.
In terms of cuts, the bill focuses on reducing healthcare and welfare expenditures, accelerating the phase-out of wind energy subsidies, and other new energy subsidies. It tightens Medicaid eligibility, directly cutting treatment subsidies by $317 billion, eliminates Biden’s SAVE income-driven student loan repayment program, reducing related expenditures by $269 billion, and cuts $246 billion in new energy investment, production, and manufacturing credits. Starting on September 30, 2025, the bill cancels subsidies for electric vehicle purchases, amounting to $192 billion.
Economic Effects: Moderate GDP Boost, Stimulating Old-Economy Sectors
The “Beautiful Bill” will boost U.S. GDP by 0.1% annually, with minimal impact on inflation. According to studies by the CBO and other international organizations, from 2025 to 2034, the bill is expected to increase real GDP growth by 0.1 percentage point annually. In terms of timing, the effects will be most significant from 2026 to 2028, when GDP growth could increase by 0.6, 0.8, and 0.7 percentage points, respectively. However, the bill’s impact on inflation is low. The CBO’s research suggests that inflation will peak in 2027, but only by 0.12 percentage points, with minimal interference in inflation after 2030.
The bill reinstates four capital expenditure accelerators, which may slightly boost U.S. capital expenditures. Corporate tax cuts are mainly reflected in increased deductions for capital expenditures, which will help accelerate investment amortization and reduce tax burdens. These include:
- Reinstating Accelerated Depreciation: Companies can immediately expense 100% of the cost of eligible equipment and machinery purchased and put into use between January 19, 2025, and January 1, 2030, which will have tax-saving effects and improve cash flow. In 2024, only 60% of the costs will be immediately expensed.
- Full Deduction for Small Equipment Investments: When companies invest in eligible equipment, they can fully deduct the purchase cost from taxable income. The bill raises the maximum deduction from $1 million to $2.5 million.
- Factory Construction Cost Deduction: Costs for constructing new factories or modifying existing production facilities in the U.S. that start construction after January 19, 2025, and are used before 2031 will be 100% deductible.
- One-Time Deduction for Investments: Domestic expenses will be immediately expensed, and companies can choose to immediately deduct domestic expenses incurred after December 31, 2024, while maintaining a 15-year amortization requirement for foreign expenses. The Tax Foundation estimates that this provision will boost capital expenditures by 0.7 percentage points, but other institutions suggest that the effect will be negligible due to the crowding-out effect caused by the increased debt. After the 2018 tax cuts, the increase in investment was also limited, mainly because the funds saved through tax cuts were largely used for stock buybacks.
In terms of industries, traditional and capital-intensive sectors will benefit, while the new energy and electric vehicle industries will be negatively impacted. Capital-intensive industries (such as manufacturing and data centers) will benefit most from investment depreciation incentives; fossil energy industries will benefit from public land extraction fee exemptions; the defense industry will benefit from increased defense spending; and clean energy tax credits will phase out early, potentially negatively impacting the wind, solar, and electric vehicle sectors. On the individual level, the bill will reduce the income of low-income groups, with a neutral effect on consumer spending. The bill will result in a 3.9% income decrease for the lowest 10% of households, mainly due to cuts in Medicaid and SNAP benefits. The top 10% of households will see an average increase of 2.3%, primarily due to expanded tax cuts like SALT, indicating a redistributive trend favoring higher-income groups.
U.S. Debt Liquidity: Stable Supply and Friendly Macro Environment, But Yield Curve Pressure Remains
In the second half of the year, U.S. Treasury supply pressure and interest rate risks are relatively controllable, but the “triple threat” risk of stocks, bonds, and currencies still needs attention. There are four main reasons:
- The U.S. Treasury’s cash balance is higher this year. As of July 2, the TGA balance was $372.2 billion, compared to only $48.5 billion before the debt ceiling was lifted in 2023. This year’s balance is more than seven times that of 2023.
- The fiscal deficit may shrink slightly this year due to the combined impact of tariffs and the bill. With a 10% average tariff rate, tariff revenue this year could reach $189.8 billion. The tax cuts in the “Beautiful Bill” are estimated to cost $133 billion, and $177 billion in student loan subsidy cuts may take effect this year.
- Treasury bond issuance follows a predictable principle. In the third quarter of 2023, the Treasury raised its net bond issuance scale, and in the second quarter, it had already given guidance on expectations for the future quarters. The second-quarter refinancing meeting has already stated that there will be no increase in interest-bearing debt auctions for the next few quarters.
- In the third quarter of 2023, U.S. CPI reached 3.7%, and GDP growth was 3.2% year-on-year. In the second quarter of this year, U.S. GDP growth had dropped to 2%, and CPI growth in May dropped to 2.4%, showing a significant change in the economic environment.
Tariffs can offset 54% of the deficit increase, and next year’s fiscal deficit ratio may moderately rise to 7.0%. The overall deficit scale of the bill is $4.1 trillion. If the U.S. maintains a 10% tariff rate long-term, tariff revenue will total $2.2 trillion. After offsetting the tax cuts, the total deficit increase is approximately $1.9 trillion, with tariffs offsetting 54% of the deficit. The increase in the deficit caused by the bill is mainly concentrated from 2026 to 2028, with increases of $223.8 billion, $388 billion, and $343.9 billion, respectively. As of May, the U.S. deficit ratio had reached 6.8%, and next year’s deficit ratio could increase by 0.7%, reaching above 7%.
The bill is unlikely to cause a substantial U.S. debt crisis but may lead to a systemic rise in yield curve premiums. By 2024, the proportion of public debt held by the U.S. relative to GDP
will be 97.8%. According to Yale University’s forecast, after the passage of the “Beautiful Bill,” the debt-to-GDP ratio may reach 103% in 2026 and 116% in 2030. However, the probability of a U.S. sovereign debt crisis remains low. First, according to studies from the Federal Reserve and AEI, the U.S. debt ceiling can reach 190% or 154%, and the probability of default is almost zero when debt levels are around 100%. Second, there has been no systemic deterioration in U.S. debt demand. Third, due to the U.S.’s privileged position, its debt-to-GDP ratio threshold may be higher than that of other developed economies. The U.S. could continue to carry a debt-to-GDP ratio above fiscal fundamentals until it loses its “privileged” status, at which point the debt would return to a level backed by fiscal surpluses. CEPR believes the U.S. can bear an additional 22% of debt.