US tax policies under Trump's administration: KfW predicts a cycle of escalating debt - U.S. financial institution, KfW, predicts Trump's tax policies may trigger a debt spiral for the country.
KfW Sounds the Alarm: USA's Debt Crisis - Thanks to Donald Trump's Tax Plans
Here's the deal, folks:
Donald Trump's tax proposals, if passed, could send the already hefty U.S. public debt stacking even higher, according to KfW's projections. The state-owned development bank raises a red flag, as the U.S. debt-to-GDP ratio might soar from the current 120% to a whopping 170% within a decade. And things could get nasty if investors start losing faith in the U.S. economy.
"Without a finger on the fiscal scale - like increased taxes or budget cuts - the USA is speeding towards a debt spiral like never before," KfW's economists warn in a new study. Trump's plans, like the "Big Beautiful Bill," packed with permanent tax cuts and yet to get the Senate's nod, could shove the U.S. closer to that edge. That's bad news for the U.S. economy's reputation.
More Money, More Problems
Tax cuts might give the economy a momentary adrenaline rush, but they could also set off a long-term debt crisis. KfW's experts are sounding the alarm: "If trust in the market dwindles, capital flees, risk premiums rise, and a dangerous debt-interest spiral could be unleashed." Dirk Schumacher, KfW's Chief Economist, warns.
Right now, the U.S. debt-to-GDP ratio is already sky-high compared to other countries (around 94%). Germany's debt, on the other hand, hovered around 63% of GDP in 2024.
The U.S. economy's big house of cards is already shaking. The dollar has taken a massive hit, the euro reached its highest level since September 2021 on Thursday, and all that chaos started with Trump's trade wars and pressure on Jerome Powell, the U.S. Federal Reserve Chair. Even the venerable status of the dollar as the world's reserve currency is in question.
Debt-Strain Cycle
In simulations for the study, KfW assumed the annual increase of the U.S. deficit by 10% and a 0.1% hike in interest rates for creditors. That would push the debt-to-GDP ratio over 150%.
KfW is worried about a vicious cycle: "Higher interest costs chew into the available fiscal space, and, in combination with increased spending, the debt-to-GDP ratio's growth becomes a self-sustaining monster." The U.S.'s escalating debt issue has been on the rise, interest costs have tripled since 2020, and the social security system is straining.
- KfW Bank Group
- USA
- Tax Plan
- Donald Trump
- Public Debt
- Frankfurt am Main
- U.S. Economy
Additional Insights: Critics argue that Trump's tax cuts and trade policies create an unstable, fragile economic environment. These policies have been likened to pushing a car off a cliff with a defibrillator - temporary life support but no long-term solution. Budget deficits exceeding 6.5% in 2025, combined with an already high debt-to-GDP ratio compared to other major economies, worry experts worldwide. The IMF has issued stern warnings about the potential debt spiraling out of control, cautioning Washington about the need to tackle the mounting debt burden to maintain stability.
- While KfW's economists warn of a potential debt spiral, Donald Trump's tax plans, like the "Big Beautiful Bill," could exacerbate the already high U.S. public debt, potentially leading to increased financing costs and straining the U.S. economy.
- In the realm of EU countries, Germany boasts a debt-to-GDP ratio significantly lower than the United States, demonstrating the contrasting fiscal scenarios; however, the U.S.'s escalating debt issue, if left unchecked, could trigger a debt-interest spiral, posing significant risks for the global economy.
