The incoming administration and Congress will make decisions over the first half of 2025 in five key economic policy domains: tariffs and trade, industrial and innovation policy, business regulation, the national debt, and tax reform. Here is our take:
Federal spending on entitlement programs and interest payments is crowding out investments in science, technology, and infrastructure. If policymakers don’t restore fiscal responsibility soon, this will increasingly affect private-sector investment and business formation and undermine America’s long-term economic growth, just as overspending has undermined great nations in the past.
The new administration and Congress will need to decide over the next year or two whether and how to restore the nation to a sustainable path.
- The dollars and cents: The national debt will reach $29 trillion, or roughly 100% of America’s GDP, around the end of this year. It is on track to reach 166% of GDP in 30 years and more than five times GDP by the end of the century, based on Congressional Budget Office projections. Interest payments are now larger than the nation’s total defense spending – and will exceed combined discretionary defense and nondefense spending within 30 years.
- Our take: The Trump Administration and Congress should launch a bipartisan fiscal reform initiative in 2025, with both entitlement reform and tax revenues on the table. America’s fiscal deficits are so large that nondefense, nonentitlement spending cuts – while desirable – won’t go very far to address the challenge. It would be possible, however, to stabilize the nation’s debt level relative to the economy by taking 10% out of future entitlement spending and adding 10% to federal revenues.
Policymakers should reform entitlements in ways that go into effect only very slowly and don’t hurt lower-income Americans. If additional revenues are needed, they should come primarily from reducing tax deductions rather than from large increases in tax rates to avoid disincentivizing work, savings, and investment.
