Investing.com - A House of Representatives version of U.S. President Donald Trump’s so-called "big, beautiful" tax bill stands to push up U.S. deficits and drive long-dated bond yields higher, according to analysts at Barclays.
Writing in a note to clients, the Barclays analysts led by Ajay Rajadhyaksha flagged that the "U.S. fiscal picture is not good", arguing that Congressional deficit projections tend to appear smaller through "sleight of hand".
"Tax cuts are usually frontloaded, spending cuts back-loaded," the analysts said. "When it comes time for those tax cuts to expire, a new Congress inevitably extends them. On the spending side, Congress often dials back cuts due to public outcry."
They added that, regardless of which administration is in power, the U.S. now seems to run a deficit-to-gross domestic product ratio of at least 6.5% to 7% of GDP "even in good times". In the case of a recession, the gap could widen even more, they warned.
Republican lawmakers in Congress have been debating and finalizing pieces of legislation related to tax cuts and spending reductions in Trump’s bill, as they race to pass the measure before Memorial Day.
The bill would then go to the Senate, with Trump aiming to sign it into law by July 4.
Crucially, Republicans, who control both chambers of Congress, will be able to utilize a rule known as "reconciliation", which allows for a 60-vote filibuster threshold to be bypassed. This would mean that the GOP could pass Trump’s bill without support from Democrats.
But media reports have suggested that there have been major disagreements within the Republican party, with some lawmakers uneasy about deep reductions to government healthcare programs like Medicare and others complaining that not enough is being done to rightsize the more than $36 trillion U.S. debt pile.
According to the Wall Street Journal, Republicans have also been at odds over proposals to phase out tax credits for renewable energy producers, which was a major pillar of former President Joe Biden’s Inflation Reduction Act in 2022. Some Republicans want these credits to be immediately axed, while another group of GOP representatives are frustrated that these are being discontinued, the WSJ said.
Meanwhile, Republicans from high-tax states like California and New York have registered their concerns about revised caps to state and local tax -- or SALT -- deductions.
Taken together, reports say the major pillars of Trump’s budget legislation -- which would see the extension of tax cuts instituted during the president’s first term -- may add around $36.2 trillion to the country’s debt over the next decade. The tax cuts themselves would cost $3.72 trillion, Reuters reported.
As markets absorb the details of the new tax bill -- "and realize that deficits are likely to keep rising for the foreseeable future" -- there is risk that longer yields continue to tick up as well, the Barclays analysts said.