US’s Reagan-era economic promises return as Trump’s AI-fueled growth fantasy
Source: Guardian Econ ↗
Treasury Secretary Scott Bessent has revived a long‑standing Republican claim that rapid economic expansion—this time powered by artificial intelligence—will generate enough revenue to tackle the United States’ mounting federal debt. Bessent pledged the nation will sustain an annual 3 percent growth rate, a figure achieved only twice this century outside the post‑COVID rebound, while former President Donald Trump echoed the sentiment, insisting the country is “growing at a faster rate than we’ve ever grown before” and that such growth will enable the government to “take care of the $40 trillion” debt over time. Financial markets, however, remain skeptical; the yield on the 10‑year Treasury spiked to its highest level in nearly 25 years, reflecting concerns that the war‑induced inflation and the country’s unbalanced finances are already driving borrowing costs higher, and that no realistic growth path can close the widening budget gap.
The underlying fiscal picture is stark. Interest payments on the national debt now consume 3.3 percent of GDP, up from a 50‑year average of 2.1 percent, while the deficit has swollen to 6 percent of GDP—double the level Bessent once promised to achieve. The Congressional Budget Office projects the deficit will approach 7 percent of GDP by 2033, and Trump’s “One Big Beautiful Bill” is projected to add $4.7 trillion to the debt through 2035. Even under optimistic assumptions—permanent tax cuts from the 2025 legislation and no revenue recovery from the Supreme Court’s strike on national‑security tariffs—the Committee for a Responsible Federal Budget calculates that achieving a 3 percent‑of‑GDP deficit by 2036 would require 4.4 percent annual growth, while balancing the budget would demand an implausible 7.2 percent growth each year. Scenarios in which AI drives growth to 15 percent annually exist in theory, but they hinge on a surge in total‑factor productivity to 2.5 percent per year—a rate the U.S. has reached only once since 1959 despite historic productivity booms from electrification, highways, telecommunications and earlier IT revolutions.
Even if AI were to accelerate growth dramatically, its fiscal impact would be muted. The technology is expected to shift earnings from labor to capital, yet capital is taxed at roughly half the rate applied to labor, meaning the government would capture a smaller share of the new wealth. Moreover, such a redistribution would likely necessitate substantial public spending to support displaced workers, further straining the budget. Meanwhile, the very AI firms that fuel these growth hopes are borrowing heavily to fund data‑center construction, competing with the Treasury for private capital as foreign central banks retreat from U.S. debt purchases. This creates a negative feedback loop: higher bond yields increase debt‑service costs, which exacerbate the deficit, undermining the premise that AI‑driven expansion can resolve the fiscal imbalance.
⚡ Effects Interpreter
🌍World Economylow impact
What this means for you
- ▶Global growth estimates are the kind of thing that shifts a bit with news like this.
- ▶Economists will chew this over, and growth forecasts may be nudged.
🏙️Local Economymedium impact
What this means for you
- ▶Wages and hiring nearby can bend with the wider economy.
- ▶The weekly shop is where these changes usually show up first.
🏦Rates & Bankslow impact
What this means for you
- ▶The cost of borrowing tends to shift gradually rather than in one leap.
- ▶Base rate decisions are usually made on data trends, not single headlines.
❤️Healthmedium impact
What this means for you
- ▶Taking a break from the headlines can do more good than scrolling on.
- ▶A little perspective usually helps once the initial shock fades.
💷Wealthmedium impact
What this means for you
- ▶A quiet review of where your savings sit rarely does any harm.
- ▶It's a reasonable moment to check your investments are still on track.
🏠Housinglow impact
What this means for you
- ▶The property ladder rarely wobbles much from a single piece of news.
- ▶Surveyors and valuers tend to factor in wider trends gradually, not overnight.
🌍 Effects for your country
The U.S.'s central bank rate currently stands at 3.75%, so a global rates move like this could feed through to local borrowing costs. The U.S.'s economy is growing at 2.3% with inflation at 3.2%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the U.S.'s own central bank rate closely. With the U.S.'s unemployment at 4.4%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in the U.S. depends more on local healthcare capacity than the figures above.
The UK's central bank rate currently stands at 3.75%, so a global rates move like this could feed through to local borrowing costs. The UK's economy is growing at 0.8% with inflation at 3.2%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the UK's own central bank rate closely. With the UK's unemployment at 5.6%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in the UK depends more on local healthcare capacity than the figures above.
France's central bank rate currently stands at 2%, so a global rates move like this could feed through to local borrowing costs. France's economy is growing at 0.9% with inflation at 1.8%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track France's own central bank rate closely. With France's unemployment at 7.9%, personal-finance effects like this land on a labour market that is already under strain. Health-system effects are harder to localise from economic indicators alone — the real impact in France depends more on local healthcare capacity than the figures above.
Romania's central bank rate currently stands at 6.5%, so a global rates move like this could feed through to local borrowing costs. Romania's economy is growing at 0.7% with inflation at 7.8%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track Romania's own central bank rate closely. With Romania's unemployment at 6%, personal-finance effects like this land on a labour market that is currently fairly stable. Health-system effects are harder to localise from economic indicators alone — the real impact in Romania depends more on local healthcare capacity than the figures above.
The UAE's central bank rate currently stands at 3.65%, so a global rates move like this could feed through to local borrowing costs. The UAE's economy is growing at 3.1% with inflation at 2.5%, the backdrop this story's effects play out against locally. Housing-market effects like this are usually felt most where mortgage rates track the UAE's own central bank rate closely. Health-system effects are harder to localise from economic indicators alone — the real impact in the UAE depends more on local healthcare capacity than the figures above.