Mon, Jul 07, 2025 page7

• The Republican budget bill is an economy killer

  • By Kathryn Anne Edwards / Bloomberg Opinion
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  The US Congress passed the “One Big Beautiful Bill Act” (OBBBA) and is sending it to US President Donald Trump for his signature so it can become law. Any hope that enough Republicans would have the courage to put the needs of the economy and the US’ fiscal position before tax cuts for the rich was met instead with callow cost fiddling.

  The damage the bill would inflict has been laid bare by the bipartisan Congressional Budget Office (CBO) in its estimates for how much it would add to the country’s already bulging debt and deficit while exposing the accounting gimmickry underpinning Republican forecasts.

  It is important to know that the methods used by the office for estimating the cost of any policy needs a counterfactual to compare against. It has always used the laws currently in force, such that a bill’s cost equals revenue and spending under the current law less the revenue and spending under the proposed law.

  However, Republicans said current law (which has the 2017 tax cuts expiring) is not right, current policy (in which the 2017 tax cuts are in place) is. With that, the trillions of dollars the CBO said the bill would add to deficits in coming years just disappeared.

  That Republicans went that route proves how horrible the bill is as legislation — and there is much math Republicans cannot change that speak to its true impact.

  There are two key channels of economic harm from the bill. The first is that it adds US$3.3 trillion to the nation’s debt within a decade. Republicans can argue it would not add to the deficit, but cannot change that the government would have to borrow trillions of dollars more because of the bill.

  Here is how that plays out:

  It raises borrowing costs throughout the economy due to the volume of borrowing. The rosiest projections are that tax cuts would add a nominal amount to GDP in the first few years, but requires so much borrowing that the deleterious effects of higher interest rates negate any budget gain that comes from a bigger economy.

  It raises borrowing costs due to the riskiness of borrowing. Moody’s Ratings was unequivocal in stripping the US of its top triple A credit score in May, declaring the country is on an unsustainable fiscal path. The timing of the downgrade, coming amid the deliberations of the OBBBA, was a clear warning of just how ill-advised a large, debt-financed tax cut is while the country is struggling with outsized debt and deficits.

  The predictions of economic harm are informed by 25 years of experience with tax policy covering US$7 trillion spent on the 2001, 2003, 2012 and 2017 cuts. Tax cuts are the largest contributor to US debt this century, more than spending increases (including two wars and Medicare expansion) or responses to recessions.

  Their cost comes with a pennies-on-the-dollar type of return. Even at considerable expense to the federal budget, the most generous tax cuts would only move family incomes by only a few hundred dollars, possibly a few thousand for some wealthy households — not enough to generate tangible positive effects.

  The second key channel of harm comes from the bill’s gutting of healthcare and nutrition support for low and middle-income Americans. It would result in 12 million people losing access to Medicaid (mainly due to work requirements), 17 million becoming uninsured (due to Medicaid loss and gutting of Affordable Care Act marketplace subsidies), at least 2 million losing food stamps (mainly due to work requirements) and benefit cuts for the remaining 40 million (mainly due to a sharp reduction in broad federal funding).

  It is a testament to how expensive tax cuts are that a bill can boast being the largest cut to Medicaid and largest cut to food stamps in the history of either program and still add US$3 trillion to US debt.

  Of course, giving food support and Medicaid to low-income Americans is cheaper than giving tax cuts to high-income Americans. The average annual household food benefit is US$4,000 and average spending per enrollee in Medicaid is about US$7,600. In comparison, OBBBA would give an average annual tax cut of US$13,500 to the 12.7 million households in the top 10 percent.

  Gutting spending on the most vulnerable Americans hurts the economy through a myriad of mechanisms, whether it is the proven ability of food stamps to help raise test scores and provide a tailwind to consumer spending, or Medicaid’s success in reducing mortality among non-elderly people or increasing the financial security of beneficiaries.

  Increasing federal debt while sapping resources for lower-income households is the tangible economic harm. The intangible is the reduced ability of the Congress to solve urgent economic problems. Some of them cannot be predicted, such as what happens if a recession hits with the Congress running even bigger deficits?

  Some can be foreseen. The Center on Budget and Policy Priorities said that the tax provisions in the bill that extend the 2017 legislation are about what it would take to eliminate the Social Security Trust Fund shortfall for the next 75 years.

  For those left shouting from the sidelines, perhaps the best they can hope for is that the bill turns out like the one that cut taxes in 2017, which for all its costs turned out to have little economic impact, good or bad. Worst case is that a bill that is so ill-timed, ill-designed and predictably harmful to the economy would be this era’s Smoot-Hawley Tariff Act, which accelerated the decline during the Great Depression, but has since become a poster child of the Congress working against the country’s economic interest and in stubborn opposition to economists’ advice.

  Things have to be bad when we are rooting for just wasting money.

  Kathryn Anne Edwards is a labor economist and independent policy consultant. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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