Post Segments
Could this be a recognition that the Trump 2.0 economic plan is in fact a credible programme to raise the sustainable US economic growth rate and thus avert rather than cause a fiscal crisis? The plan is being aggressively implemented and there are already clear signs that it is working. A fiscal crisis is much more likely in the UK, where policy is almost the exact opposite.
Although Trump’s tariffs hog the headlines the key criticism of the Trump 2.0 economic plan is one of “fiscal recklessness” in the face of an unsustainable Federal debt trajectory. Trump is accused – via his “Big Beautiful Bill” (BBB), now passed into law – of instituting a huge $4 trillion tax cut even though US budget deficits are already running at 6-7% of GDP and Federal debt at 100% of GDP. The critics swallow whole the Congressional Budget Office (CBO) projections that under Trump’s policies Federal debt as a % of GDP will be on a rising trajectory for the foreseeable future. The key assumption behind this projection is that US real GDP growth will continue at its post-2008 average of 1.65% p.a. However, the debt and deficit forecasts are extremely sensitive to the growth assumption. If annual growth is instead 2.5% p.a. the debt to GDP ratio roughly stabilises around the 100% level for a decade, and then falls steadily thereafter, while 3.0% growth sees the ratio start falling earlier and reach very low levels by 2055.
Trump’s Supply Side Reforms Will Raise US Economic Growth and Avert Fiscal Crisis
Trump’s Treasury Secretary Scott Bessent and Chief Economic Adviser Stephen Miran are acutely aware of this key relationship, which is why the whole thrust of the Trump 2.0 economic plan is to raise the sustainable US growth rate to the 2.5-3.0% level, still below the 3.4% 1947-2007 average. The CBO (a body with as poor a forecasting record as our own OBR) assumes the Trump plan will have no positive impact on US economic growth. This assumption is just not credible:
- The supply side policies of Trump 1.0 – tax reform and deregulation – resulted in US growth in the desired US economic growth range in the president’s first three years (the actual average was 2.8%), before the Covid pandemic struck in the fourth year.
- The Trump 2.0 economic plan is more ambitious than Trump 1.0 and, learning from frustrations of his first term, is being aggressively implemented by a blizzard of executive orders, departmental decisions, and legislative activity. The media and commentariat have focused on the “irresponsibly large”, supposed tax cut in the BBB. In fact, the BBB prevents a huge tax increase from taking place, because the major Trump 1.0 tax reforms would otherwise have expired at the end of 2025. With Fed monetary policy still restrictive, the US economy only growing slowly, and significant cuts in Federal spending being implemented, a big tax rise in 2026 would have been a colossal policy error, almost certainly putting the US economy into recession. This in turn would have increased the Federal deficit and possibly triggered the very fiscal crisis that the critics warn about.
- This focus on the continuation or otherwise of the Trump 1.0 tax reforms has meant that little attention has been paid to the many other policy measures contained in the BBB (which runs to more than 1000 pages). Fairly considered the BBB is nothing less than an historic supply side reform package. Amongst the key measures are the following:
* New tax cuts and reforms which are aimed at promoting business investment, including expanded tax relief for small business, and crucially a renewal and expansion of 100% immediate expensing for equipment and machinery. This reform was backdated to Q1 2025. The 2017 Estate Tax relief is also expanded, indexed to inflation, and made permanent. This means the Estate tax (the UK equivalent is Inheritance Tax) exemption for a married couple is $30 million. No chasing away of millionaires in the US!
*Opening up of Federal lands and waters to oil, gas, coal, geothermal and mineral leasing. Cancellation of mandates forcing the use of electric vehicles.
*There are a number of Federal revenue raising and debt reduction measures, including a higher endowment tax on large universities, increased timber sales on Federal lands, authorisation of the sale of expended spectrum to strengthen rural broadband, cancellation of student loan bailouts, making universities accountable for student loan defaults, and implementing work requirements for able bodied welfare claimants.
*Spending cuts of $1.7bn over 10 years by reducing Wind and Solar subsidies, cutting Medicaid, and forcing states to pay a bigger portion of the food stamp programme.
- In addition to the BBB numerous other supply side and deficit reduction measures are being implemented through executive orders and other legislation, including the following:
*By executive order all new Federal regulations must be matched by the removal of ten existing regulations. The Trump 2.0 deregulation drive is Trump 1.0 on steroids, with the previous effort itself an important boost to the economy, particularly to small business. DOGE (Department of Government Efficiency) – still operating despite Musk’s departure – has built an AI tool that identifies regulations that need replacing/trimming. This tool is already working in two departments and will enable the one for ten rule to be implemented, with a target of halving the current 200 000 Federal rules by January 2026, with $100bn of regulation costs already eliminated.
*After the passage of BBB the House Budget Chairman announced plans for further large cuts in Federal spending by year end. Congress also passed a “recission” bill which eliminated $9bn in already appropriated spending – a relatively small but symbolically important cut because it is the first time in 50 years that Congress has used this recission power.
*Trump also announced the end of Federal funding for the California High Speed Railway, the US equivalent of HS2 and an equally prodigious waste of public money.
* Trump has signed an executive order to allow US citizens to invest their retirement plans – so called 401K accounts – in a wider range of assets, including private equity.
Trump is Winning the Tariff Wars
Contrary to consensus expectations Trump’s tariff policies – though initially crude and erratic in implementation – have not triggered either a US or global recession. Financial markets have been volatile at times, but US bond yields are currently lower than a few months ago and world stock markets are higher. Some critics still insist that the financial markets are delusional and that disaster is just around the corner. Could it instead be that markets have recognised the remarkable US supply side reforms described above and also seen that Trump’s tariffs are succeeding in their objectives? In recent weeks the US has reached trade deals with the UK, Vietnam, Indonesia, Japan, and the EU and made significant progress in talks with a number of other countries, most notably China. There is a clear template to these deals. The countries concerned have effectively accepted Trump’s position that the global trading system has been unfairly tilted against the US, by agreeing the following:
*The US will impose a basic import tariff on most imports of 10%- 20%, with variations on some key goods such as steel. This means that the US will be (and already is) raising substantial ongoing tariff revenues, thus helping to reduce the budget deficit and promote US re-industrialisation.
*To improve US access to their markets, either through lower tariffs (zero in the case of the EU) or through changed trade regulations. This will boost US exports.
*To purchase a stipulated level of specified US products – usually LNG ($650bn in the case of the EU)– and/or to invest specific amounts in new US production capacity ($550bn in the case of Japan, $750bn from the EU).
The new US tariffs have not so far had a significant upward impact on US inflation, nor are they likely too. There will be a one-off lift to some prices, but exporters to the US are likely to cut profit margins to maintain market share. As long as US money growth remains in its current non-inflationary range of 2-6% no long-term impact on US inflation can occur. The overall impact of the tariffs therefore will be to raise US economic growth through higher exports and reduced imports.
Dramatic Early Signs of Economic Progress
Although US GDP growth has been subdued in H1 of the Trump Presidency – averaging 1.5% annualised, with a decline in Q1 followed by a rebound in Q2 – there are already dramatic signs of underlying improvement. The Q1 growth was negative because of extensive stockpiling of imports ahead of the new tariffs, and the impact of cuts in government spending. However, the key number is a powerful 16% annualised rise in business equipment production in H1, the biggest rise since 1997. A strong new wave of business investment seems to be underway – the key to higher productivity and sustainable economic growth. This strength in capex spending has been accompanied by a rise in blue collar wages, with real weekly earnings back to levels last seen in the last quarter of Trump’s first term, after having declined during the Biden presidency. Further good news was a 2025 June Federal budget surplus – the first for a decade – with revenues up 13% and spending down 5% compared to June 2024. Income and payroll tax receipts were up 15% and tariffs receipts up 280%. It is early days, but these are remarkable signs of progress in key variables.
Conclusion
My assessment is that Trump’s tariff policy and supply side reforms – with more to come – comprise a credible programme to achieve the stated target of a 2.5 -3.0% sustainable growth over the next ten years. In that case the US Federal Debt to GDP ratio will stabilise and then fall back below the 100% level. Fears of a major US fiscal and economic crisis will fade, and speculation about the demise of global dollar hegemony appear absurd.
This positive picture for the US unfortunately shines a depressing light on UK economic prospects. Starmer and Reeves recognised the vital need to raise UK economic growth in their election campaign – the relationship between growth and debt and deficits is of a similar order to that of the US – but their policies have been almost the exact opposite of “Trumponomics”. To their credit they have continued the drive for free trade of the previous Tory governments, with notable trade deals reached with the CTPPP, India and the USA (US tariffs on UK exports are 10%, the lowest of any country). However, they have increased already excessive government spending, resulting in a 70% increase in public sector borrowing in the 2024/25 fiscal year in spite of record high taxes, chosen to increase taxes on jobs and enterprise, reversed an already feeble deregulation drive in their disastrous “reset” with the EU, raised business costs with higher minimum wages and radical changes to employment rights, and pursued the economically damaging net zero agenda with ideological fervour. The UK is thus condemned to a path of continued economic stagnation in which the burden of public sector debt will continuously rise. We will be teetering on the edge of a major fiscal/currency crisis for the foreseeable future. One can only hope that the adoption of radical supply side reforms and fiscal discipline will eventually be enforced, either by the markets/IMF and/or by a change of government. By then the US – and at the extreme even Argentina – should at least offer a proven template of what needs to be done.
Robert Lee 30th July 2025
The primary source used in this analysis is the US think tank “Unleash Prosperity”.
