The One Big Beautiful Bill Act: Implications for U.S. fiscal policy
Washington is mixing growth-oriented tax reforms with selective spending cuts while ignoring the root cause of America’s worsening fiscal predicament.
In a nutshell
- Permanent tax cuts boost investment incentives but add fiscal uncertainty
- Green subsidies cuts save hundreds of billions, strengthen energy markets
- Spending reforms reduce costs, yet entitlements an unresolved challenge
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The One Big Beautiful Bill Act (OBBBA) marks a significant turning point in United States fiscal policy. Signed into law on July 4 by President Donald Trump, the legislation pairs sweeping tax cuts with targeted spending reforms and dismantles many of the environmental subsidies included in his predecessor’s legislative achievement, the Inflation Reduction Act (IRA). Overall, the reforms are designed to boost domestic capital formation, strengthen labor market incentives and restore some categories of spending to pre-pandemic levels.
While the act includes meaningful pro-growth elements, such as permanent full expensing for business investment and permanently lower marginal tax rates, it leaves the most intractable fiscal challenges unaddressed. The result is a package that reduces some of the distortions of the U.S. tax code and slows the growth of some spending, but does little to resolve mounting federal debt and widening annual deficits.
Whether the OBBBA proves to be a genuine fiscal inflection point or merely another step toward American fiscal deterioration will depend on Congress: Can lawmakers sustain pro-growth reforms while reining in spending beyond the limited subsets addressed in the new law?
Tax reform: Cementing the 2017 cuts
Only weeks after Republicans passed the 2017 Tax Cuts and Jobs Act, GIS noted that the reforms ushered in a new era for U.S. investment, but warned that for their benefits to last, Congress would ultimately need to pair the tax cuts with serious spending restraint. Those reforms during the first Trump presidency were simple tax cuts and revenue system reforms. The OBBBA takes the next step: making most of those 2017 provisions permanent while layering on additional reductions to both taxes and spending, among other measures.
The law locks in the most important pro-growth changes originally enacted on a temporary basis. These include full expensing for equipment and machinery as well as lower marginal rates and numerous simplifications across the personal income tax system. Each of these changes enhances long-run incentives to work, save and invest. These measures are part of President Trump’s recipe for raising the growth rate of the U.S. economy, a necessary (though not sufficient) ingredient in stabilizing the national debt-to-GDP ratio.
Whereas the 2017 bill lowered tax rates by curbing special-interest tax subsidies, the OBBBA unfortunately moves in the opposite direction by adding dozens of new carve-outs.
Whereas the 2017 bill lowered tax rates somewhat by curbing special-interest tax subsidies, the OBBBA unfortunately moves in the opposite direction by adding dozens of new carve-outs. Many of these reflect campaign promises: an expanded $40,000 cap on the write-off for subnational taxes, exclusions for tips and overtime pay, a senior deduction, auto loan interest relief and a “Trump Saving Account.”
These provisions, scheduled to expire after 2028, join a raft of permanent tax preferences for niche constituencies, from Alaskan whalers and rural development zones to biofuels. These provisions are poorly targeted, fiscally costly and economically unjustified. They represent a step backward in tax neutrality.
Rolling back green energy subsidies
One of the act’s brightest spots is the rollback of major green energy tax subsidies. The open-ended credits for wind, solar, hydrogen and other renewable energy sources had no effective budget caps and were on pace to cost taxpayers more than $100 billion annually by the 2030s. By phasing them out, the OBBBA saves roughly half a trillion dollars over the next decade and even more in the long run.
Equally important, removing these subsidies helps preserve the reliability of the U.S. energy grid and restores a measure of market discipline to energy policy. Rather than steering capital toward politically favored technologies, the reforms let markets decide the most efficient sources of energy investment. This represents both a fiscal saving and increased competitiveness, setting the U.S. apart from the government-managed sclerosis of energy markets in Europe.
Spending reforms and fiscal impact
On the spending side, the OBBBA includes $1.4 trillion in gross cuts over the next decade relative to the conventional budget baseline. After accounting for $300 billion in new spending on defense, immigration enforcement and other administration priorities, the package delivers about $1.1 trillion in net spending cuts. Add to that the $500 billion saved from repealed green subsidies, and the legislation represents one of the largest spending cuts in decades.
Notable reforms include returning food aid and some healthcare program spending as a share of the economy to levels seen during Mr. Trump’s first administration – hardly a draconian cut but an important step toward normalizing entitlement growth. The act also delivers a $300 billion reduction in federal education spending, highlighted by the long-overdue elimination of open-ended subsidies for graduate programs.
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Like the tax cuts, many of these measures are pro-growth. Some of the spending reforms come through work requirements, which reduce dependency and boost employment. Eliminating graduate subsidies should improve incentives in higher education, reducing student debt while encouraging better talent allocation. Finally, the legislation directs new funding toward the president’s deregulatory agenda and authorizes expanded land-lease sales for energy and mineral development, further reinforcing supply-side growth.
But despite these steps, the OBBBA does not place the U.S. federal budget on a sustainable path. Even with faster economic growth, the act is likely to add trillions to the country’s debt, and even more if its many temporary tax breaks are eventually extended. The central problem of America’s growing fiscal predicament remains untouched: the long-term growth of Social Security and Medicare spending (old age entitlement programs), which together drive nearly all of the increase in the non-interest budget deficit. Without reforms to these programs, fiscal consolidation will remain elusive.
Scenarios
The OBBBA strengthens U.S. investment incentives by cementing full expensing and lowering marginal tax rates. However, a nation’s competitiveness is shaped by more than just statutory tax rates. The persistence of tariffs, creeping industrial policy and unsustainable debt remain threats. If deficits rise unchecked, higher interest costs could crowd out private investment and lead to a fiscal crisis, eroding the very competitiveness gains the bill seeks to achieve. Similarly, if policymakers continue to pursue interventionist industrial policy, the benefits of market-driven reform will be undermined.
Most likely: Fiscal deterioration as supply-side gains offset by tariffs and deficits
The OBBBA’s permanent tax relief and deregulatory provisions deliver a significant supply-side stimulus, making the U.S. more attractive for global investment. Nevertheless, these gains are weighed down by tariffs, trade uncertainty and institutional drift toward state-directed capitalism. Republicans fail to pursue additional rounds of spending restraint, and the fiscal picture continues to deteriorate.
Possible: Rollbacks of cuts, resumption of spending and fiscal strain
Congress reverses key expenditure reforms for healthcare spending programs, reinstates green energy subsidies and makes the temporary populist tax carve-outs permanent on a bipartisan basis. Deficits widen sharply, forcing future lawmakers to raise taxes. Growth slows, debt rises and the fiscal outlook becomes more intractable.
Less likely: Economic growth reinforces fiscal reforms
In this optimistic, but less likely scenario, trade uncertainty eases as bilateral deals are struck. Stronger growth from the OBBBA and deregulation boosts revenues, improves investor confidence and emboldens Republicans to pursue further spending reforms. Markets view the U.S. as the best place in the world to do business, creating a virtuous cycle of growth and incremental fiscal consolidation.
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