How Debt Could Blow Up the Trump Economy

Donald Trump is pitching, as only Donald Trump can pitch, that a major economic revival is energizing America for a new run at greatness, and that he’s the straw stirring the elixir. In one representative recent tweet, the President declared, “Our economy is now booming and with all I am doing, will only get better … Our country is WINNING again!”

Though “booming” is Trumpian overstatement, it’s undeniable that by many criteria, the President’s agenda is proving remarkably successful. In Trump’s first three full quarters in the White House, GDP clocked growth just shy of his vaunted goal of 3%, a performance that by recent standards looks stellar. The stock market has added a quarter to its value since the election, a $ 5 trillion vote of confidence. The jaunty outlook is recharging animal spirits in corner offices: In its January survey of small companies, the National Federation of Independent Business found that 32% of the enterprises rated the present climate “a good time to expand”; that was a record high and a threefold increase from late 2016.

Will soon be heading to Davos, Switzerland, to tell the world how great America is and is doing. Our economy is now booming and with all I am doing, will only get better…Our country is finally WINNING again!

— Donald J. Trump (@realDonaldTrump) January 25, 2018

Fueling the giddiness is the President’s signature legislative achievement: the Tax Cuts and Jobs Act, which slashed rates for corporations from 35% to 21%. The new law is a runaway hit with business leaders. Companies as varied as American Airlines (aal), Walmart (wmt), and Verizon (vz) predict that the measure will swell their earnings for years to come, and marquee CEOs from JPMorgan Chase’s (jpm) Jamie Dimon to Boeing’s (ba) Dennis Muilenburg laud it as a powerful tonic for American competitiveness. The looming profit surge has prompted more than 200 Fortune 500 companies to raise their minimum pay (U.S. Bancorp, Humana), issue one-time bonuses to employees (Home Depot, Walt Disney), or both.

Trump’s heady economic potion, however, is masking misguided policies that could leave those same businesses with a severe hangover from today’s celebration. The U.S. government’s huge and growing budget deficits have become gargantuan enough to threaten the great American growth machine. And Trump’s policies to date—a combination of deep tax cuts and sharp spending increases—are shortening the fuse on that fiscal time bomb, by dramatically widening the already unsustainable gap between revenues and outlays. On our current course, we’re headed for a morass of punitive taxes, puny growth, and stagnant incomes for workers—a future that’s the precise opposite of what Trump champions.

By 2028, America’s government debt burden could explode from this year’s $ 15.5 trillion to a staggering $ 33 trillion—more than 20% bigger than it would have been had Trump’s agenda not passed. At that point, interest payments would absorb more than $ 1 in $ 5 of federal revenue, crippling the government’s ­capacity to bolster the economy, and constraining the private sector too. Contrary to the claims of the President and his supporters, the U.S. can’t grow fast enough to shed this burden; indeed, Trump’s agenda on immigration and trade looks likely to stunt that growth. (More on that later.) “This is almost like climate change,” says Mark Zandi, chief economist at Moody’s Analytics. “It doesn’t do you in this year, or next year, but you’ll see the ill effects in a day of reckoning.”

In the absence of decisive, quick action to tackle this slow-motion crisis, the best-case scenario for the next few years is that America becomes a much riskier place to do business. A high debt load will limit our flexibility to keep the economy on an even course. “Countries with high debt don’t respond aggressively to downturns,” says Harvard economist Kenneth Rogoff. If the U.S. slips into recession, we’ll lack the option of lowering taxes or increasing spending on infrastructure, for example, as tools to revive growth. And as the debt load grows, efforts by the Federal Reserve to stimulate the economy with lower rates would be more likely to feed runaway inflation. “Then, investors will dump Treasuries,” says John Cochrane, an economist at the Hoover Institution. “That will drive rates far higher, and make the budget picture even worse.”

For now Washington is neglecting the coming crunch, and that should make business leaders plenty worried, says David Cote, the recently retired CEO of Honeywell (hon). In 2010, Cote served on the Simpson-Bowles Commission, an 18-member group charged with finding ways to put America on a sustainable fiscal path. Though the commission’s platform died in Congress, it drew praise for its balanced approach to raising revenues and reforming Medicare and Social Security. Cote says that even though the problem is far more dire today, policymakers are digging a deeper hole. “We made a grand, bipartisan bargain in Simpson-Bowles to reform entitlements and raise taxes,” Cote tells Fortune, noting that prior to the Great Recession, the ratio of debt to GDP was 35%. This winter, with debt more than twice as high, marvels Cote, “President Trump and Congress agreed to reduce taxes and raise spending. I’m afraid that people are just giving up.”

Rather than celebrating, Cote warns, CEOs should be planning for an ultra-risky future where the worsening financial climate could cut deep into their profits. One danger is that foreign investors, alarmed both by our crushing debt and the absence of plans to tame it, could dump our Treasuries, pushing interest rates higher. “A one point rise in rates adds $ 200 billion every year to the debt,” says Cote. A jump in yields would also raise the threshold at which new investments become profitable, forcing companies to retrench.

Corporate leaders may also fret that the only solution to our debt woes is a jolting rise in taxes. “That would have a huge impact on how businesses view the investment climate,” Cote says. “Companies will get worried and pull back on investment and wait and see.” But to wait and see, he predicts, is to court stagnation and deterioration. That kind of stasis would turn the good economic news of President Trump’s first year into a short story.

Of course, America’s fiscal picture was becoming unsustainable well before Trump took office. What’s astounding is how much worse his tax cuts and spending increases have rendered the outlook, and how quickly.

The causes of this menace to prosperity are twofold. First, the U.S. has long chosen to lavish seniors, and to a lesser extent support the poor, with European-style benefits, while borrowing to fund those programs rather than levying European-style taxes. It’s a politically popular path: In a poll released last April, the Pew Research Center asked voters whether they supported spending reductions to 14 specific budget areas. A majority of Democrats opposed cuts to any, while Republicans endorsed shrinking just one, “assistance to needy people around the world.”

That brings us to the second point. Trump has championed, and Congress has enacted, two laws that go in the opposite direction of fiscal reform.

According to Congress’s Joint Committee on Taxation, the Tax Cuts act, signed in December, will decrease expected revenues by a total of $ 1 trillion over the next 10 years, an average of $ 100 billion annually, even after any boost to growth and incomes from lower taxes. That number assumes that most of the personal income-tax reductions expire in eight years, and a break for expensing capital equipment starts phasing out in 2023. “Those breaks are extremely likely to be renewed,” says Brian Riedl of the conservative Manhattan Institute—and in that more likely scenario, he projects, the tax plan will lower revenues by $ 160 billion over the following decade.

The February federal budget deal, meanwhile, hikes outlays in both of the two categories of “discretionary” spending, defense and federal programs from foreign aid to housing subsidies, by an unprecedented 12%, or $ 150 billion a year in 2018 and 2019. It essentially obliterates bipartisan spending caps established in the Budget Control Act of 2011 that had kept recent deficits partially in check. These spending increases are so popular on both sides of the congressional aisle that they’re almost certain to establish a new floor for discretionary spending, from which future expenditures will rise.

All told, the tax cuts and increased spending will raise deficits by roughly $ 375 billion annually, by Riedl’s estimates, including additional interest. The fiscally responsible path would have been to enact revenue-raisers and spending curbs elsewhere in the budget to fill the gaps. But although the tax bill included some offsets, they were swamped by the sweeping reduction in taxes.

Last June, the Congressional Budget Office (CBO) forecast that deficits would reach $ 1 trillion in 2022. Because of the new laws, America will exceed the $ 1 trillion mark much earlier, in 2019, assuming current tax and spending policies are extended, according to the nonpartisan Committee for a Responsible Federal Budget (CRFB). Those probable shortfalls will keep ballooning even if the economy thrives. Under the CBO’s forecast, deficits would have reached roughly $ 1.6 trillion in 2028 without the new laws. Now, the CRFB predicts a shortfall of $ 2.4 trillion. Largely owing to the deficit-widening measures, the U.S. in a decade will borrow $ 1 in every $ 3 it spends, vs. $ 1 in $ 4 if outlays and revenues had remained on their prior path.

In a decade, federal debt will reach an overwhelming $ 33 trillion, the equivalent of 113% of GDP—and $ 6 trillion higher than the CBO had forecast before the Trump agenda passed. Interest on U.S. borrowings would become the fastest-growing item in the federal budget, more than tripling to almost $ 1.1 trillion annually. At that point, carrying costs would equal one-half of spending on Medicare, and if inflation or interest rates exceeded the relatively low thresholds in the CBO’s forecasts, the interest bill would soar even higher. “That increase represents money the U.S. is just throwing away—that’s crowding out the funding on everything from health care to the military,” says Marc Goldwein, the CRFB’s senior policy director.

That crowding out has real consequences. The cost of servicing the exploding debt would exert tremendous pressure on the government to eliminate investments that could fuel growth. In the past, spending that modernized highways and mass-transit systems or enhanced higher education has boosted the productivity of America’s workers. That raises incomes, boosts savings rates, lifts consumer spending, and swells savings that fund private investment. The interest burden generated by the mushrooming debt threatens to turn this virtuous cycle into an unaffordable luxury.

It’s impossible to say whether a fiscal crisis, or growing outrage over the alarming numbers, might prompt corrective action before that happens. What’s certain, says Sarah Carlson, a senior vice president at Moody’s Investors Service, is that “the longer we wait, the tougher the choices on benefits cuts and tax increases become.”

Yet as Cote points out, policymakers are showing no willingness to take the unpopular, potentially radical steps needed to restore America’s fiscal balance. A sign of just how far Congress has shifted away from fiscal caution is the Senate vote on Feb. 9 to raise discretionary spending: Opposition from Republican budget hawks such as Rand Paul of Kentucky and Mike Lee of Utah was overwhelmed by the 34 GOP Senators who joined 36 Democrats in the upper chamber to pass the deficit-swelling measure. Nor is Trump likely to fill the fiscal-responsibility vacuum: The President failed to even mention fiscal “deficits” or “debt” a single time in his 5,866-word State of the Union Address.

There is one scenario in which the U.S. could stay on its current course, and that’s to keep blithely borrowing from the rest of the world. America has been able to play the spendthrift because foreign lenders have shown a huge appetite for both our government and corporate debt—they now own $ 6 trillion of our $ 15.5 trillion in publicly owned Treasuries.

For most nations, such colossal borrowings would push interest rates higher as the government competes with business for a limited pool of lendable assets. But for decades, that hasn’t been the case for the U.S.: A worldwide glut of savings from Chinese, Japanese, and other overseas investors holds our rates in check. The U.S. is, for now, the world’s most powerful, well-diversified, and entrepreneurial economy, and in times of global stress, ­money pours into the safest of all safe havens, the United States. The Great Recession only proved the thesis. “We exported a financial crisis to the rest of the world, and they sent us their money,” says UC–Berkeley economist Alan Auerbach.

The president failed to even mention “deficits” or “debt” a single time in his 5,866-word state of the Union address.

But assuming that the rest of the world will continue to turn a blind eye to American profligacy is a risky bet, and it will get riskier if Congress keeps skirting the tough choices for the next 10 years. A full-blown Greece-in-2010-style debacle—a slowdown of the economy, coupled with punitive interest rates, that forces major reforms—is faintly possible but unlikely. A more probable plotline involves a scenario in which the annual debt numbers become so bad, and draw so much attention, that our looming fiscal cliff once again becomes a major political issue. Americans can get riled over gigantic budget deficits: Deficit anxiety after the excesses of the 1980s prompted a bipartisan deal to raise taxes and shrink deficits under the first President Bush in 1990.

A cyclical downturn, a sharp decline in stock prices, or an unexpectedly steep increase in real interest rates dictated by skeptical overseas investors might be the catalyst that prompts legislators to get serious. It wouldn’t cause catastrophe, but by lowering revenues or widening the already yawning deficits, it would train the spotlight on the potentially disastrous outlook. “Policymakers would form plans that wouldn’t need to raise tons of money right now, but would kick in gradually,” says Goldwein. In other words, they’d shift the U.S. to a glide path that would reassure the markets.

The Trump administration argues that such maneuvers aren’t a high priority, because economic growth will solve a lot of the problem. “Through a combination of tax reform and regulatory relief, this country can return to higher levels of GDP growth, helping to erase our fiscal deficit,” Treasury Secretary Steven Mnuchin declared late last year. But few outside the administration believe that America can expand at the 3% rate that Trump and Mnuchin are targeting. The CBO, Organization for Economic Cooperation and Development (OECD), and World Bank all forecast an average reading of around 2% over the next decade. A major reason: a decline in the rate of workforce growth because of our aging population.

What’s more, Trump’s highly unpredictable, and highly contradictory, approach to economic policy makes even 2% growth uncertain. Trump supports legislation that would reduce the annual number of legal immigrants by 50% over 10 years. “There’s no more direct way to cut growth than restricting immigration,” says Doug Duncan, chief economist at Fannie Mae. Duncan notes that foreign workers both start far more businesses than Americans, and that they’re needed to avoid potentially crippling labor shortages in industries from farming to construction to tech. Trump is also delivering on what his business supporters hoped he’d abandon: deploying tariffs to punish imports, starting with heavy duties on foreign-made steel and aluminum. “Tariffs raise prices for U.S. manufacturers using those materials, and slow sales and investment,” says Moody’s Zandi.

As business-friendly as Trump’s tax and regulation stances may be in the short term, these policies are growth killers. The overriding danger is that by pushing hard against traditional immigration and open trade, Trump could force the economy into a recession—one that could be made worse because it would prompt investors to ask for higher interest on our already gigantic debt.

Perhaps more to the point: Even if GDP did wax at the 3% level that the Trump team seeks, the extra juice would lower total debt by only 10%, or $ 3 trillion, by 2028, according to the CRFB. “Adding a point to growth won’t come close to solving the problem,” says Cote. To ensure long-term stability, policymakers will have to do something that’s been almost unthinkable in recent memory—simultaneously cut spending and pump up revenue.

The recent fiscal legislation caused negative, structural changes on both the spending and revenue fronts—making the task of keeping the debt in check much harder than it would have been even a year ago.

Prior to the Trump tax cuts, the CBO was projecting that federal tax revenues would grow robustly, from 17.7% of GDP in 2018 to around 18.4% a decade later. But because of the cuts, revenues in 2018 are projected to be just 17.2% of national income. Government spending, meanwhile, was set to expand from 20.5% of GDP in 2018 to 23.6% in 2027 (the CBO did not project the figure after that date). But the February deal will trigger a huge jump in discretionary spending starting in 2019, raising the overall 2027 figure to 24.8% of GDP.

A crucial plank in fiscal reform is slowing runaway spending on entitlements, chiefly Social Security and Medicare. Put simply, the nation’s daunting demographic math dictates that the benefit programs keep absorbing bigger and bigger shares of national income. The cohort of Americans over age 65 is expanding much faster than the workforce; from 2017 to 2030, 20 million more baby boomers will reach retirement age, while only 14 million Americans will begin employment. The pool of seniors on Medicare is also getting older, and as a result, sicker. And older Americans vote, in huge numbers, to protect their privileges.

Still, there are ways to slow entitlement growth. In Social Security, taxpayers will contribute about $ 1 to its trust fund for every $ 1.10 retirees are projected receive in benefits over the next decade. Indexing benefits to inflation instead of wages, the latter of which are forecast to grow 1.5 percentage points faster annually, would return the program to balance without damaging purchasing power. On Medicare, the government could restrain costs by gaining authority to negotiate prices for prescription drugs, and by reinstating the requirement that drugmakers provide rebates, a policy that generates savings for Medicaid but is barred for Medicare. Congress could also set doctors’ fees for outpatient hospital visits to the lower rates charged for office consultations. Bolder moves include introducing market forces that turn patients into cost-conscious consumers. One prescription: Giving seniors fixed payments to buy private insurance.

Getting military and other discretionary spending to grow less slowly won’t be easy, but it has been done in the past. Congress should enact new spending caps along the lines of the Budget Control Act, which helped to shrink outlays as a share of national income from 2013 to 2017. But because we’ve waited so long, even major spending reforms leave a big hole—a chasm that can be filled only by taxes.

The longer we wait to enact a solution, the higher the new levies required will need to go. Fortune ran numbers to calculate how much extra revenue the U.S. would need to raise, over the next decade, if it lowered the rate of growth in Social Security by one percentage point, reduced increases in Medicare, Medicaid, and other health care spending by a proportional amount, and held discretionary spending below growth in GDP (albeit from the higher base established by the new laws). For our purposes, we assumed that corporate tax increases are off the table under the current administration. Our goal was to come up with spending cuts and revenue increases that would keep the ratio of debt to GDP at or below where it was at the end of 2017, at 76%. Though that’s around twice the average over the past 50 years, it’s what would be affordable given the CBO’s projections of low interest rates for years to come.

So here’s what the cost of sanity looks like. If we start reforms now, including the slowdown in spending, the government would need to phase in noncorporate tax increases averaging $ 900 billion a year from the end of 2018 through 2028. That would require raising federal tax collections by between 21% and 22% over that period. (That’s more than twice the increase we would have needed if we’d started now, without the recent deficit-ballooning legislation.) What if we wait four years, and begin our 10-year projections at the start of 2023? We’d be coping with four more years of colossal growth in debt. To wrestle the debt-to-GDP ratio back to 76% by 2032, the U.S. would require an average tax increase of $ 1.2 trillion over today’s baseline. That’s a rise of 24%.

If congress hopes to solve the debt crisis, says one economist, “whatever they come up with will be something that seems impossible now.”

What kind of taxes could produce that bounty? “We’ve gotten about as much money as we can out of the personal income tax,” says Rudolph Penner, director of the CBO during the Reagan administration and now a fellow at the Urban Institute. Riedl, of the Manhattan Institute, reckons that doubling the top two personal rates to 70% and 74% respectively (politically a near-impossibility) would close just one-fifth of the projected shortfall from Medicare and Social Security over 30 years. Other proposals include a carbon tax on gasoline sales, limiting deductibility of state taxes for businesses by imposing the same caps that now apply to individuals, and taxing generous employer-provided health care plans.

But it’s unlikely that anything close to the necessary number can be raised by tinkering with the existing tax code. Virtually every other industrialized country deploys consumption taxes to support their welfare states. On average, around 60% of those levies are value-added taxes, or VATs, which resemble a sales tax but are actually paid by companies as goods go through each stage of production. They raise, on average, about 6% of GDP, at typical rates of roughly 20%.

The U.S. doesn’t have a VAT or a national sales tax—and given how enormous a bite such taxes take out of income in other countries, it’s easy to see why they haven’t gained traction in Congress. But our fiscal plight is becoming so desperate that America may soon find itself embracing solutions it never before contemplated. “A VAT won’t happen under this President and this Congress, but its stock will rise,” says William Gale, an economist at the liberal-leaning Brookings Institution. “Whatever they come up with will seem to be something that’s impossible now.”

Indeed, if our politicians finally grow a collective backbone and strive to put America’s finances on a firm footing, the pain will be wrenching. Even though tax increases can be phased in, they’ll still need to start at a high plateau because we’ve waited so long, and they’ll rise from there. America has never seen anything like the kind of tax hikes that could be in the cards. Over time, consumers will have less to spend on cars, appliances, iPhones, and vacations. Sales and profits will suffer. And the likely consumer pain might generate political pressure to undo at least some of the corporate tax cuts that Trump is so proud of.

Dave Cote recalls that he favored a VAT when he first joined the Simpson-Bowles Commission. “Then someone pointed out that the government doesn’t need a new engine to collect taxes, and I changed to opposing the VAT because it would just keep ratcheting up spending.” But government spending has ratcheted up anyway—now with the blessing of the Republican legislative majority and a populist President. On budget matters, the irresistible force of Americans’ love for rich benefits collides with the immovable object of Americans’ resistance to high taxes. As the old Johnny Mercer song goes, “Something’s Gotta Give.”

A version of this article appears in the April 2018 issue of Fortune with the headline “Deep in Debt.”