January 22, 2025 - 10:00am

Outgoing treasury secretary Janet Yellen has handed the new president a nasty surprise. Last Friday, just three days before Donald Trump’s inauguration, Yellen sent a letter to congressional leaders stating that the government would reach its statutory borrowing limit on 21 January, after which the Treasury would be forced to resort to emergency measures to continue to keep the government funded.

Is it a coincidence that the money has run out on Trump’s first day in office? Possibly. But it may also be the case that handing him an empty piggy bank is a strategic move. This could set up a fight between the incoming administration and Republicans in Congress, whom the president will have to convince to raise the debt limit.

Trump himself has criticised Republicans in Congress for their previous decisions on the debt ceiling, and even called for the limit — first established in 1917 — to be scrapped, a position also promoted by Elon Musk. Incoming treasury secretary Scott Bessent said in congressional hearings last week that the debt ceiling is a “nuanced issue”, but that if Trump insisted on scrapping it he would work in that direction.

The problem with scrapping the debt limit is that it might send a negative signal to markets about the fiscal credibility of the United States. DC think tanks which keep an eye on US finances, almost all of which are Right-leaning and allied with Republicans in Congress and the Senate, are projecting a very grim trajectory for the country’s fiscal future. The Peter G. Peterson Foundation, for example, projects that on its present trajectory the debt load will rise from 97.2% of GDP in 2023 to 166.2% by 2054.

Nor is it just the debt burden itself that is of concern to those monitoring the fiscal situation. Interest payments on the current federal debt are now the government’s third-largest expense, and are almost as large as the entire defence budget. The Peter G. Peterson Foundation only sees these rising further, from an annual cost of around $1 trillion in 2025 to roughly $1.7 trillion in 2034.

The federal deficit itself currently sits at around 6.5% of GDP, which is pretty much unheard of outside of wartime or recession. The incoming administration has committed to reducing the figure to 3%, but it remains unclear how it would achieve this without substantial tax increases or cuts to government programmes such as social security — which Trump has taken off the table.

A report last summer suggested that during his first presidency Trump added twice as much to the national debt as Biden, borrowing $8.4 trillion to his successor’s $4.3 trillion. Yet this doesn’t change the fact that the deficit has increased and, much like Labour in the UK, Trump is entitled to blame his immediate predecessors for a difficult inheritance. There is already chatter in the markets which seems designed to put pressure on the new president. In December a managing director from Pimco, one of America’s premier bond funds, wrote in the Financial Times that “we’ve been less inclined to lend to the US government at long maturities, favouring opportunities elsewhere”. She went on to suggest a series of harsh measures that the Trump administration might undertake to bring the deficit under control.

But could Trump get away with these? Two weeks ago, former UK prime minister Liz Truss’s lawyers sent Keir Starmer a cease and desist letter demanding that he stop accusing her of crashing the economy. To this day, she blames a push by civil servants in the Treasury and the Bank of England who did not like her tax policies for the market turmoil that resulted. The mini-meltdown that Truss’s tax cuts triggered certainly raises questions about whether markets, the financial media, and bureaucrats can purposely trigger a bond market crisis to interfere with a government they do not like. Vice President JD Vance raised such a possibility in an interview with Tucker Carlson last year.

During Trump’s first term, the Democrats pushed the Russiagate scandal on the administration as political revenge. This time around, there is a good chance they will use America’s dire fiscal straits as a similar cudgel.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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