Transcript: Do Republicans still care about debt?

This is an audio transcript of the Swamp Notes podcast episode: ‘Do Republicans still care about debt?’

Marc Filippino
President Donald Trump’s “big, beautiful” tax bill is making its way to the Senate, and Republicans certainly have some feelings about it.

Ron Johnson voice clip
We need to focus on spending, spending, spending.

Marc Filippino
But other GOP senators want to cut some and spend even more. Right now, the big spenders are winning. It all boils down to one big philosophical question: can the US keep borrowing?

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This is Swamp Notes, the weekly podcast from the Financial Times, where we talk about all the things happening in US politics, finance and the economy. I’m Marc Filippino, and this week we’re asking: do Republicans still care about fiscal responsibility? Here with me to discuss is Edward Luce. He’s the FT’s US national editor and columnist. He also co-writes our Swamp Notes newsletter. Hey, Ed.

Edward Luce
Great to be with you, Marc.

Marc Filippino
And we’ve also got James Politi. He’s the FT’s Washington bureau chief. Hey, James.

James Politi
Hi, Marc.

Marc Filippino
So James, among other things, this bill makes permanent President Trump’s tax cuts that he introduced in his first term. And the estimate is that it will raise the debt ceiling by $4tn. It also cuts spending on a number of government programmes. How central was the debt question as Speaker Mike Johnson navigated the tensions here?

James Politi
Well, I think it’s very central. The Republicans had vowed to slash spending in this bill while extending the tax cuts. And they cast themselves as the champions of, sort of, fiscal conservatism and fiscal discipline. But actually, as you pointed out, the net effect of the legislation is that it will increase US debt levels by trillions of dollars, several trillions of dollars over the next 10 years. The impact of the tax cuts is far greater than the impact of the spending cuts. And so the Republicans are finding themselves in a situation where they argued and campaigned on reducing the debt, but actually they’re adding to the debt.

Marc Filippino
James, before we go any further, let’s do some vocab. We hear about the concerns about the US debt problem, we hear about the debt ceiling and issues over a budget deficit. What’s the difference between all these words?

James Politi
Well, the budget deficit is the annual difference between what you spend and what you take in. The overall debt level is the accumulation of the budget deficits over time. And the debt ceiling is a statutory limit on the amount of money that the country can borrow. And so, essentially, every now and then, Congress has to increase the borrowing limit to allow for new debt. That limit is coming up for a new vote over the summer. Otherwise, the US Treasury will run out of cash.

Marc Filippino
Got it. Now, Ed, what’s the stake with the debt growing? You recently wrote that the debt itself hasn’t really bothered markets. But combined with the volatility of Trump’s policymaking, you know, it could make for bigger problems, right?

Edward Luce
So the nominal debt, you know, which is — what? $30tn or something, James will know the exact number — is not what matters, even if it’s growing, and that’s not what matters. What matters is, is it outstripping growth? If as a share of GDP, it is growing — which it now is, and has been for really quite a while, since the 2008 financial crisis and then dramatically stepped up with all the Covid spending, and now further accelerating as a share of GDP with Trump’s “big, beautiful” bill, as he calls it — well, then that begins to bother markets. Once it gets sort of north of 100 per cent of GDP, that begins to bother markets, and we’re at about 123 per cent of the GDP now, and this will raise it much further over the next decade, as James said.

It doesn’t mean that America can no longer borrow. It just means it’s going to be paying slightly more normal borrowing costs because foreigners need to be compensated more for the risk of owning US Treasury bonds, for the risks that some black swan will interrupt America’s full faith and credit. And so it just means there’s going be what in Britain under Liz Truss, the very shortlived prime minister three years ago, they dubbed the “moron premium”, just you’ve got to pay more to borrow.

Marc Filippino
Don’t want to ignore moron premium, but I do want to put a finer point on it. We’re talking about an issue where the debt has been growing at a quicker rate than gross domestic product. But is this also a Donald Trump-specific moment or is it something bigger than that?

Edward Luce
So what we’re seeing today is two things. One is the shock of Trump’s sort of declaration of economic war on the world since “liberation day” and how that’s really, really frightened the markets. And second is the sort of culmination of really two, three decades of the build-up of American debt. And you know that old cliché, I mean, Ernest Hemingway was asked how he went bankrupt, he said slowly, then quickly. Well, a lot of people are sort of thinking along those lines about the US debt situation. But it’s not going bankrupt. And it’s not gonna default unless it chooses to default. Congress could, as it often does, play chicken over raising the debt ceiling. And if you don’t raise it, you’re not allowed to borrow, and therefore you default, you stop repaying existing Treasury bond holders, foreigners and Americans alike. But I doubt that will happen. Congress has never actually really done it. So I don’t expect America is going to default.

But I do expect that the recent premium on American borrowing is going to show up every time Treasury has auctions, whether they’re for two-year bonds, 10-year bonds, 20-year bonds, 30-year bonds, this is gonna show up. And at a time of higher interest rates, it means that as a share of the budget, of the federal budget, the amount that interest payments eat up, which is already larger than the Pentagon’s budget, is going to get larger and larger, and that leaves fewer dollars to spend on the future. So the costs will manifest themselves in that way.

Marc Filippino
James, does it make sense to talk a little bit about different factions within the Republican party when it comes to debt? Is it split along a particular line? Do certain factions feel a certain way?

James Politi
Well, there are kind of hardline conservatives who are driving a very hard bargain. Most of them are in the House Freedom Caucus in the lower chamber, but there are some in the Senate as well. And they are truly calling for like the deepest possible spending cuts to all sorts of government programmes. And they’re often based in very conservative districts. And then you have more moderate members of the Republican party who are often in swing districts, so they have tougher re-election fights. They want less aggressive spending cuts, and they want more tax relief. For instance, they want an expansion of the deduction for state and local taxes in many cases. And then you have sort of the middle ground, which are the traditional leadership Republicans who are mostly aligned with the White House, but the real battle will be played out between the sort of hardline conservatives from very Republican districts pitted against the more moderate members of the House.

Marc Filippino
Getting back to our central question, we have a party in power that’s now talking a lot about fiscal responsibility, never really quite reaches those savings. Is it still central to their priorities? Is the narrative that Republicans are still the fiscally conservative party, is that still true?

James Politi
Well, they still get a lot of credit for that from the voters. And I think that’s based really on the belief and the reality that Republicans are more aggressive on spending cuts. And most, I think, voters see fiscal responsibility through the frame of spending cuts and the social safety net and spending on government programmes. They don’t really see it through the lens of the tax side of things, and they don’t really believe that tax cuts actually have a negative impact on the country’s fiscal situation. And so I think that’s why Republicans are viewed as the . . . still as the party of fiscal conservatism, even though that hasn’t proven true through Trump’s first presidency and George Bush’s . . . George W Bush’s presidency either.

Marc Filippino
Ed?

Edward Luce
Yeah, I mean, really since Reagan, Republicans have been about tax cuts and very successfully dressed it up as being fiscal conservatism. But cutting taxes, if you don’t have corresponding matching cuts in expenditure, is not fiscally conservative. It’s fiscally liberal, you know, for want of a better term. And so the Republican record is considerably worse than the Democratic record in terms of rising budget deficits and adding to the public debt, the national debt. Much worse. There’s one Republican in the last 50 years who’s raised taxes. That was George Bush Sr, and his party turned on him and he lost to Bill Clinton in 1992. Ronald Reagan cut taxes. George W Bush, or Bush Jr, cut taxes. Trump cut taxes and is doing so again without, in each case, any corresponding spending cuts. The only president who has ever balanced the budget since the second world war is Bill Clinton in the late 1990s. And so I think the public sort of branding of Republicans being fiscally conservative, and Democrats being fiscally reckless, is very close to the opposite of what the track record shows.

Marc Filippino
Guys, not to bring it back to partisan politics, but where are the Democrats now on the question of national debt?

James Politi
I mean, I think the Democrats are . . . you know, have been through a kind of a cycle of conflicting messages really on the debt. During the, you know, in the aftermath of the financial crisis, Barack Obama decided to create this bipartisan fiscal commission to try to bring down the debt and put the US on a path of sort of more fiscal responsibility and sustainability. That effort sort of failed because both sides weren’t able to come to any kind of agreement. And the pressure on both parties to be more responsible on the debt and deficits eased.

And throughout the first Trump term and into the pandemic rescue plans and then the stimulus that followed the pandemic rescue plans, so through Trump 1.0, Biden, there wasn’t really much pressure to tackle the debt. And this is the sort of first time in really a while and maybe 10-plus years that I’ve seen an increased focus on fiscal matters. And of course, at the moment you’re hearing Democrats bring it up more. They’re attacking the Republicans for being reckless. The Republicans are in a difficult position because even those who are genuine fiscal conservatives have to defend and support President Trump. Some of them are even coming out and saying his trade policies are fiscally responsible because they generate a revenue through the tariffs which can then be applied towards . . . to offset the tax cuts and the rest. But this is the first time where markets are also, you know, in quite a long time where markets are starting to bristle at fiscal issues in the US. So it’s really coming to the fore.

Marc Filippino
James, one final question: do you see this broader economic discussion coming up in the debates over this tax bill or the budget? What are the big questions likely to be?

James Politi
I mean, I think the big faultline over the next few months with regards to the tax bill are going to be in plain view. Democrats are gonna attack the tax bill for being a giveaway to the rich and a punishment really to lower-income, middle-income families that rely on the social safety net which is gonna be cut significantly through this bill.

And on the Republican side, there’s a debate unfolding between the members who are kind of pure aggressive spending cut champions and who really want to see very, very even deeper spending cuts than the ones that are in place, and those who are more moderate on the spending side and who are, kind of, more aligned with the White House and the Republican leadership and are trying to just simply get this bill through. And I think that’s where . . . those are where the tensions are gonna come out in the coming weeks.

Marc Filippino
All right, guys, we are going to take a quick break. And then as always, when we come back, we’re going to do Out of the Swamp.

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All right, we are back with Out of the Swamp, where we ask our guests to talk about a story that they’re watching outside of Washington politics. Ed, I’m gonna start with you. What do you got?

Edward Luce
So I was in Canada on Monday and Tuesday giving a talk at Toronto about my new book, Zbig, the biography of Zbigniew Brzezinski, and that happened to coincide with the visit of King Charles and Camilla to Ottawa and I was really struck. Of course, he was invited there as kind of a symbol of Canadian sovereignty to give the speech to . . . they call the speech from the throne, which is normally given by Canada’s governor-general. It sets out the government’s agenda. But the real sort of reason for the visit, very short visit, was just to show that Canada, you know, is different to the United States because they’re all feeling understandably a little bit paranoid at the moment, given Trump’s rhetorical predations on their sovereignty and, you know, I didn’t have Charles being Canada’s symbol of sovereignty on my bingo card, but now I find it unforgettable.

Marc Filippino
I’m sure Mark Carney will take any help that he can get. James, what about you? What story is on your mind?

James Politi
It’s not really a story. It’s more about the joys of having a puppy . . . 

Marc Filippino
Yeah, all right!

James Politi
. . . which is dominating our summer. And I had a dog as a kid and now to have one as an adult is . . . It’s an organisational challenge because we have to figure out who will stay with her during the summer break. But also just like a wonderful rediscovery of what it’s like to own a pet and take them for a walk as much as we can in the middle of all the madness that is unfolding in the city.

Marc Filippino
That is lovely. We are a cat household in my house, and it certainly is a pet, is all I’ve got for you there. I want to thank our guests. Edward Luce is the FT’s US national editor and columnist. You should check out the book that he mentioned on former US national security adviser Zbigniew Brzezinski, which is out now. It’s called Zbig: The Life of Zbigniew Brzezinski. Thanks, Ed.

Edward Luce
Thanks so much, Marc.

Marc Filippino
And James Politi is our Washington bureau chief. Thanks as always, James.

James Politi
Thanks, Marc.

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Marc Filippino
This was Swamp Notes, the US politics show from the FT. If you want to sign up for the Swamp Notes newsletter, we’ve got a link to that in the show notes. Our show is mixed by Sam Giovinco and produced by Lauren Fedor, Katya Kumkova, and Henry Larson. Special thanks to Pierre Nicholson. I’m your host, Marc Filippino. Our co-global head of audio is Topher Forhecz, original music by Hannis Brown. Check back next week for more US political analysis from the Financial Times.