KfW estimate
Trump’s tax plans: KfW sees USA before debt spiral
The high debts and Trump’s erratic customs policy shake the trust of the financial markets into the United States, the dollar is as weak as it has not been in years. The KfW warns of a tilting point.
According to the KfW, the already large public debt of the United States could increase to dangerous heights – also because of Donald Trump’s tax plans. The state sponsoring bank considers it conceivable that the debt rate will recently climb from around 120 percent to more than 170 percent of economic output within ten years. She warns of a tipping point from which investors lose confidence in the USA.
“Without countermeasures such as tax increases or expenses, the United States could get into a significantly stronger debt spiral than previously assumed,” writes the KfW in a new study. Suggestions such as Trump’s “Big Beautiful Bill Act”, which contains permanent tax cuts and still needs the approval of the Senate, should further increase the structural deficit. International trust in the US economy is at stake.
Trump’s tax plans cost a lot of money
Even if tax reductions could boost the economy at short notice, they would spend the risk of “reaching a tilting point for the US debt relief,” warns the KfW. “If the trust of the markets disappears, capital outflows, rising risk premiums and a dangerous interest debt spiral could be started,” writes chief economist Dirk Schumacher.
The US debt rate is currently well above the international average (almost 94 percent). For comparison: Germany was in debt in 2024 with around 63 percent of gross domestic product.
The trust of the financial markets in the USA has already been shaken. For example, the dollar has lost a lot of value, the euro rose to the highest level since September 2021. An essential reason is in Trump’s chaotic customs policy. In addition, there is harsh criticism of US Federal Research chief Jerome Powell, from whom Trump repeatedly demands interest rates. There is also uncertainty about the status of the dollar as a world lead.
Spiral of interest costs and higher expenses
For the study, the KfW assumed in a simulation that the US deficit increases by ten percent annually and interest rates to creditors by 0.1 percentage points. An increase in state deficit by 5 percent a year and interest rate by 0.1 percentage points would therefore lead to a debt rate of over 150 percent.
The bank warns of a spiral: “Higher interest expenses reduce the available household scope and, in combination with increasing expenses, increase the dynamics of the debt rate.” Even under the applicable legal situation, the public debt is inexorably increasing, the interest expenses have tripled since 2020 and the social security system has come under pressure.
dpa
Source: Stern
