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As the national budget bill (aka the “One Big Beautiful Bill”) works its way through Congress, there’s been a lot of debate about the national deficit — and specifically, how the bill’s tax cuts and other provisions could raise it. But what exactly is a national deficit, and why should we care? Let’s get into it: A national budget deficit happens when the federal government spends more money than it takes in with taxes. That’s typical for the U.S., which has only had a budget surplus in four of the last 50 years. But it’s a hot topic right now as the debt-to-GDP ratio nears record levels. Just as we may lean on a credit card to cover a gap between income and spending, the government also borrows to cover its expenses. The size of the deficit drives how much it must borrow — and pay interest on. The latest budget bill, which Senate GOP leaders are trying to get passed before July 4th, includes many additions and subtractions to the government’s bottom line. On the expense side of the equation, the bill would cut spending on programs like Medicaid and SNAP but boost spending in areas like defense and border security. On the income side, it would extend President Trump’s 2017 tax cuts and make at least some tips exempt from taxes, reducing tax revenue. All told, the Congressional Budget Office estimates that the version that passed in the House last month would raise the national deficit by $2.8 trillion over the next decade. The Trump administration disputes this figure — and notes that the CBO also forecast that new tariffs would reduce the deficit. But again, the topic is hotly debated on the Hill and beyond. Whenever the government spends more than it has, it borrows money by selling Treasury securities like T-bonds to investors. But much like carrying a credit card balance, deficit spending can be a vicious cycle, especially when interest rates are high: The U.S. has racked up $36.2 trillion (yes, trillion) in outstanding national debt, and last year spent $1.1 trillion just on interest payments — more than it spent on the military. So what? While it’s still TBD how (and if) the House and Senate versions of the budget bill will come together, a growing deficit can have financial consequences for Americans and the broader economy:• Interest rates could go up… even more. As debt concerns grow, investors in Treasury securities tend to demand higher interest rates to compensate for the added risk. (Moody’s recently downgraded the U.S.’s credit rating from the highest Aaa.) That tends to drive up interest rates for Americans, particularly for loans like mortgages, which are heavily influenced by Treasury bond yields.
• It could trigger a recession. High interest rates can depress spending, investment, and wages — especially if the government eventually hikes taxes to offset deficit spending.
• Bond investments could suffer: If Treasury yields go up, prices for existing bonds would likely fall because newly-issued bonds would pay a higher interest rate. That would lower the value of investors’ older bonds.
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The U.S. Spends $1 Trillion a Year to Service Its Debt. Here's Why Experts Say That's a Concern. (CBS News) How Americans View the GOP’s Budget and Tax Bill (Pew Research Center) Policy Basics: Deficits, Debt, and Interest (Center on Budget and Policy Priorities)Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
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