The Fiscal Tightrope: How Tax Cuts and Rising Debt Costs Are Reshaping America's Economic Future

The United States is walking a fiscal tightrope. On one side, structural tax cuts enacted in 2025 under the One Big Beautiful Bill Act (OBBBA) promise to stimulate economic growth by reducing corporate and individual tax burdens. On the other, a ballooning national debt—now 100% of GDP—and surging interest costs threaten to crowd out critical investments in infrastructure, education, and innovation. This delicate balance is reshaping economic priorities and recalibrating risk for investors, as policymakers grapple with the long-term consequences of a debt-driven fiscal strategy.

The Tax Cut Gambit: Growth or Gaps?

The OBBBA, signed into law by President Trump in July 2025, made permanent the 2017 Tax Cuts and Jobs Act (TCJA) provisions while introducing new temporary cuts. The Tax Foundation estimates these measures will reduce federal revenue by $4.1 trillion over a decade, even after accounting for dynamic economic growth. While the act is projected to boost long-run GDP by 1.2% and increase capital stock by 0.7%, it also exacerbates deficits. Combined with spending reductions and interest costs, the OBBBA is expected to add $3.8 trillion to the deficit from 2025 to 2034.

The trade-off is stark: for every dollar of economic growth generated, the government must borrow more to fund its operations. This creates a self-reinforcing cycle where lower tax revenues and higher deficits drive up interest rates, which in turn increase borrowing costs. The Congressional Budget Office (CBO) warns that under a "high-tariff alternative scenario," national debt could reach 134% of GDP by 2035, with interest costs consuming 5.1% of GDP—a 200-basis-point jump from current projections.

The Interest Rate Quagmire

Rising interest costs are the elephant in the room. The CBO projects that net interest payments will surge from $1 trillion in 2025 to $1.8 trillion by 2035, accounting for 4.1% of GDP. This is not just a fiscal problem—it's a market stability issue. As the U.S. government issues more debt to service existing obligations, Treasury yields climb, squeezing both public and private borrowers.

The implications are already visible. In Q3 2024, interest payments consumed 15.2% of federal outlays, a record high. With J.P. Morgan forecasting $4.4 trillion in Treasury supply in 2025, the risk of a "bond vigilante" backlash looms. Investors are already diversifying into non-U.S. assets and real assets like gold, which hit a record $2,500 an ounce in early 2025. The U.S. dollar's dominance as a reserve currency is being tested, as seen in the 2022 UK fiscal crisis, where a lack of credible funding plans triggered a currency collapse.

Investment Risks and Strategic Adjustments

For investors, the confluence of fiscal policy and market dynamics demands a recalibration of risk. Here are three key considerations:

1. Duration Risk in Fixed Income: As Treasury yields rise, the value of long-duration bonds falls. Investors should consider shortening their bond portfolios or hedging with inflation-linked securities. The 10-year Treasury yield, currently at 4.2%, could test 5% if fiscal discipline falters.
2. Equity Exposure to Fiscal Policy: Sectors sensitive to interest rates—such as real estate, utilities, and financials—are under pressure. Conversely, companies with strong cash flows and low leverage may outperform.
3. Geographic Diversification: The U.S. dollar's strength is no longer a given. Allocating to non-U.S. equities and currencies—particularly in emerging markets with improving fiscal frameworks—can mitigate overexposure to U.S. debt dynamics.

The Path Forward: A Call for Fiscal Prudence

The OBBBA and its fiscal consequences underscore a broader truth: structural tax cuts without corresponding spending reforms are a recipe for long-term instability. While the act may provide short-term growth, it risks entrenching a debt spiral that could undermine the U.S. economy's resilience.

Policymakers must address the root causes of rising deficits: aging demographics, healthcare costs, and the growing share of the budget allocated to interest payments. Investors, meanwhile, should prepare for a world where fiscal policy and market stability are inextricably linked. The days of assuming U.S. Treasuries are a risk-free haven are over.

In the end, the U.S. fiscal experiment of 2025 is a cautionary tale. Tax cuts may spark growth, but without a plan to manage debt, the cost will be borne by future generations—and the markets will not wait for them to arrive.