US debt ‘set to explode’ beneath Trump

America’s national debt is “set to explode” under Donald Trump, top bankers at the Institute of International Finance (IIF) have warned.

Analysts at the Washington-based institute said the incoming president’s plan to slash taxes without equal cuts to spending would push US national debt up from around 100pc of GDP today to more than 135pc in a decade’s time.

Inflation is also likely to rise as Mr Trump stokes spending and makes imports more expensive by slapping tariffs on foreign-made goods.

The US national debt already stands at close to $36 trillion (£28 trillion) and the IIF warned debts could reach more than 150pc of GDP if Mr Trump’s tax cuts are more costly than expected for the US treasury. 

Mr Trump’s plans include making income from overtime and from tips tax-free. Such policies will stimulate spending, the IIF said, but will also reignite inflation.

The president-elect has said he wants to raise taxes on imported goods, bringing in extra revenue for the treasury and, hopefully, stimulating local manufacturing. However, this too will stoke inflation by making overseas-made goods more expensive.

Such price pressure will likely force the Federal Reserve to abandon its plans to cut interest rates, the IIF predicted, keeping borrowing costs higher for longer.

Analysts said: “Recent rate cuts have been part of the Fed’s strategy to support growth, yet the fiscal expansion under Trump could force the Fed to reconsider this path, particularly if inflationary risks emerge more rapidly than anticipated.”

Long-term borrowing costs have already risen sharply in financial markets in anticipation of higher US debts and higher-for-longer interest rates. The yield on 30-year Treasuries, as US bonds are known, has risen from a low of under 4pc in September to more than 4.5pc today.

“The recent spike in the 30-year treasury yield, in particular, signals investor concerns about the sustainability of an expanding debt load and the potential for inflation as fiscal pressures mount,” the IIF said.

Yields have declined this afternoon following the latest inflation data, which showed the consumer prices index rose from 2.4pc to 2.6pc in October, as expected by analysts.

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