Trump’s four years in office saw $US8.4 trillion of debt added, with about $US4 trillion attributable to the response to the pandemic. Biden’s term so far has seen $US4.35 trillion of additional debt, about $US2.1 trillion of it related to the pandemic. (Biden actually added $US6.2 trillion of new spending, but partly offset it with $US1.9 trillion of spending cuts.)

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By far the biggest non-COVID-related element of Trump’s spending was the $US1.9 trillion Tax Cuts and Jobs Act enacted in 2017.

The near-term outlook for the US government’s finances may hinge on what happens to that legislation, which had a sunset clause and is largely due to expire in December next year.

Trump says he wants to extend the existing tax cuts for corporations and predominantly wealthy Americans, which would cost an estimated $US4.6 trillion over the next decade.

He has also spoken of a desire for an additional round of cuts and another reduction in the corporate tax rate – which he cut from 35 per cent to 21 per cent in his last term – to 15 per cent.

That would add at least $US1 trillion to the cost over a decade. His peculiar proposal, reflected in the Republicans’ platform, to abolish taxes on tips would cost another $US250 billion.

The major source of offsetting revenues would come from his plan to impose a 10 per cent universal base tariff on all imports and a 60 per cent tariff on imports from China.

Given that America’s total imports are about $US3 trillion a year and that they would probably shrink if those tariffs were imposed – because they would be paid for by US companies and consumers, acting as a de facto consumption tax – there would be negative impacts on economic activity in the form of higher inflation and interest rates, reduced investment, fewer jobs and a significant increase in debt.

Trump and his advisers are borrowing from the Ronald Reagan era of supply-side economics to argue that his policies of lowering taxes and widespread deregulation would boost growth and therefore increase government revenues and lower the ratio of debt to the larger economy.

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There is no compelling evidence that reducing taxes and regulation stimulates growth, although experience says that it does lower government revenues.

Biden would retain the lower tax rates for individuals earning less than $US400,000 a year, but would otherwise allow the Act to expire. He plans – if he has the numbers in Congress – to lift the corporate tax to 28 per cent, impose minimum tax rates on companies and the super-wealthy, and raise the income tax rates for those earning more than $US400,000. He would lower tax rates or give tax credits to those below that threshold.

Biden’s plan would, according to the US Tax Foundation, raise about $US4.4 trillion of revenue before spending about $US900 billion of it via his tax cuts and credits. It would be one of the largest tax increases in US history.

While Biden does have ambitious social spending plans, he has said his policies would lead to $US3 trillion of debt reduction over the next decade. That’s not going to be enough to shift America’s fiscal trajectory.

There are those who argue that, as the US issues its debt in its own currency – a currency that is the world’s reserve currency – debt and deficits don’t matter because there can never be an actual debt crisis.

That may be true, but the interest on the US government’s existing debt was $US263 billion when Trump took office and is now – because of the increased debt and higher interest costs – close to $US1 trillion and rising. It’s already a bigger cost item than defence or healthcare spending. It will crowd out the government’s discretionary spending.

An increase in the existing debt levels that funds reduced taxes will not only shrink government revenues but is likely to increase inflation rates, leading to higher interest rates and therefore a higher cost to the budget. Trump’s proposed tariffs would also add to inflation and interest rates.

The two largest holders of US Treasury securities, China and Japan, have been reducing their holdings. China’s motivation is obvious, after it saw what happened to Russia’s US-dollar-denominated assets when it invaded Ukraine. Japan’s strategy appears to be related to its efforts to support its own currency.

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The Fed has conducted a U-turn from quantitative easing during the pandemic, where it became the biggest buyer of US government bonds, to quantitative tightening, where it allows securities it holds to mature without reinvesting the proceeds.

It therefore effectively adds to the supply of debt hitting the market, and it is now private investors being asked to soak up that swelling flood of debt. That “ask” will only grow over the next few decades.

Whether because of inflation or the supply-demand equation in the bond market, it will have global consequences if US interest rates are higher than they would have been without new debt-increasing policies.

The IMF has estimated that a 1 percentage point increase in the US 10-year bond rate flows through to 90 basis point rises in advanced economies and a near-total pass-through to emerging market economies.

What happens in the US economy reverberates across the world and throughout global financial markets. This means that the policies that Biden and Trump espouse during their campaigns, and the make-up of Congress after the US election matter – and not just to Americans, but to the rest of us too.

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