Relief swept Washington, D.C., after Congress ended a budget standoff and passed a short-term spending bill on Dec. 21, averting a government shutdown. But that year-end legislative battle may foretell further fiscal chaos in 2025, including the risk of another downgrade of US debt.
Donald Trump will take office on Jan. 20 with his fellow Republicans running both houses of Congress. That Republican “trifecta”— full control of the legislative and executive branches — has boosted hopes that Trump will be able to extend a huge set of tax cuts due to expire at the end of 2025 and perhaps rein in government spending.
The Trump agenda, however, now looks a lot shakier, and the recent funding battle demonstrates why.
Though Republicans control the House, the party is split into factions, including a group of budget hawks that numbers more than 30. Those Republicans are dead set against tax cuts or spending hikes that add substantially to the national debt, now more than $36 trillion.
The Dec. 21 spending bill passed the House by a comfortable 366-34 margin, but that’s because every Democrat voted for it. Democrats were willing to join most Republicans in voting for the bill so President Biden doesn’t have to manage an unpopular shutdown during his final days in office. Once the House voted, the Senate passed the funding bill without any problem.
Chaos ahead? President-elect Donald Trump speaks at AmericaFest, Sunday, Dec. 22, 2024, in Phoenix. (AP Photo/Rick Scuteri) ·ASSOCIATED PRESS
But minority Democrats aren’t likely to vote for Republican priorities once Trump takes office. And once the next Congress convenes on Jan. 3, Republicans will have just a five-seat majority, which is even thinner than the current GOP breakdown. That means partisan legislation will require virtually every Republican vote, a feat that has become notoriously difficult in the fractious GOP during the last several years.
Republican lawmakers are already working on a huge set of tax cuts meant to be the capstone for the first year of Trump’s second term. That includes an extension of all the individual tax cuts enacted in 2017, which expire at the end of 2025. Republicans also hope to include new measures Trump has proposed, such as eliminating the income tax on tips.
But the latest revenue fight raises fresh doubts about whether Republicans can get it done.
“Our discussions with Republican staff on Capitol Hill have increasingly suggested that a partisan bill that addresses the expiring [tax cuts] will be inordinately difficult, if not impossible, to pass next year,” Henrietta Treyz, co-founder of Veda Partners, wrote in a recent analysis. “The government funding debate neatly illustrates why Republican staff is feeling anxious about their prospects next year.”
The basic problem is that extending the 2017 tax cuts would add about $4 trillion to the national debt, with the bill even higher if Congress lards in additional tax breaks. Republicans will try to cut spending to offset some of that, but most spending goes toward defense, which most Republicans support, plus politically popular programs such as Medicare and Social Security. Major spending cuts would outrage voters, including many Republicans, which means there’s no real way to prevent tax cuts from ballooning the debt even more.
When Congress first passed the Trump tax cuts in 2017, 12 House Republicans voted against the bill. But Republicans had a far larger majority then and could afford to lose some internal support. In 2025, just two or three defections will be enough to sink GOP legislation. And there seem to be more than two renegade Republicans.
The most telling moment in the recent funding dispute wasn’t the vote tally on the final bill but the vote on an earlier bill Trump urged all Republicans to vote for. Thirty-eight Republicans bucked Trump, dooming that bill. Their main objection was that the bill would have suspended the debt limit, the law that limits the total amount of money the US government can borrow.
The bill Congress finally passed on Dec. 21 did not address the debt limit, which means Trump is going to have to tangle with that, which he was hoping to avoid. During the last big spending fight in 2023, Congress suspended the debt limit, but only until Jan. 1, 2025. That means it will have to raise the debt limit again next year, saddling Trump with what has routinely become an ugly political fight.
The next 12 months, in fact, are going to be filled with fiscal fireworks. There will be another funding fight in March, which is when the current temporary spending expires. Around that time, the deadline may be drawing near for when Congress has to raise the borrowing limit. Then there will be another spending battle in September, which is when the government’s fiscal year ends and Congress needs to approve the next year’s funding.
Keeping Republicans in line will be no party: Speaker of the House Mike Johnson, R-La., walks to the House Chamber at the Capitol in Washington, Friday, Dec. 20, 2024. (AP Photo/Jose Luis Magana) ·ASSOCIATED PRESS
Markets usually survive government shutdowns without much bruising. But debt ceiling fights can get harrowing because there’s an implicit threat that the US will default on some payments if Congress doesn’t raise the limit.
S&P downgraded the US debt rating for the first time ever in 2011 following a congressional standoff that left the Treasury days away from a default. Fitch cut the US debt rating after the 2023 showdown, while Moody’s changed its US outlook from stable to negative. All three agencies cite political dysfunction as their main concern.
Since the US fiscal situation gets progressively worse, those concerns are likely intensifying. In 2023, when Fitch cut the US rating, the national debt was $32 trillion. Eighteen months later, it’s $4 trillion higher. Plus, there have been some signs that endless US borrowing is beginning to rattle bond markets, which is how a US debt crisis would likely begin.
Trump may still get his tax cuts. But the political brawls it will take to get there will leave the United States in even shakier fiscal shape than it's in now.
Somebody, at some point, is going to have to say no more.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
