So far in his second term, Donald Trump has sought to reshape the American economy in his image and the effects of his policies are affecting global markets. From trade tariffs to tax reforms and central bank interference, Trump’s economic vision is disruptive and setting the tone. Meanwhile, in the UK while there are many of the same budgetary and economic challenges, Keir Starmer and Rachel Reeves do not possess the same force as Donald Trump, and UK domestic politics is tripping over itself.
Trump’s Bet that Tariffs and Growth will Offset Borrowing Surge
When Trump first announced his tariffs in early April, his manner was combative and uncompromising. The message was clear: economic consequences were secondary to asserting American dominance in trade. Initially, this stance suggested little room for negotiation. However, the reality has been more nuanced. Over time, the administration has introduced pauses, diluted some of the harsher measures, and has struck a series of trade agreements, which have partially released the pressure and fear that had engulfed the global economy.
Yet, despite these concessions, the average level of US tariffs is now the highest it has been since the 1930s. This highlights how even if conditions haven’t reached the worst case scenarios, there is still a large change being enacted from the era of trade liberalism which has dominated recent decades. The long-term implications of these trade taxes remain a concern for economists and investors alike.
In July, Trump secured passage of his “One Big Beautiful Bill”, a tax and spending package that delivers substantial tax cuts, but with the plans for spending cuts previously sought by Elon Musk watered down or ignored completely this is forecast to add $3.4 trillion to the US national debt, nearly 10% of the current total.
Trump’s team argues that tariff revenues and productivity gains from artificial intelligence will offset the costs, but this is a high-risk gamble.
In the short term, the tax cuts are expected to stimulate economic growth. However, assuming Trump’s bet fails and debt does spiral the cost of servicing this extra borrowing would become a burden for the US economy.
Central Bank Independence Interference
While his tariffs have been the most widely discussed element of his presidency so far, his interference in the Federal Reserve also has the potential to affect global markets. Central bank independence has been a proud feature of Western democracies with expert committees adjusting interest rates based on market conditions rather than political agendas. This independence helps smooth out economic cycles and maintain investor confidence.
Yet, Trump has repeatedly criticised Fed Chair Jerome Powell, accusing him of keeping rates too low under Biden and too high under his own administration, and has previously talked of firing him. While Trump has stepped back from this threat on Powell, on Monday night it was announced that Trump is seeking to fire a separate member of the Federal Reserve, governor Lisa Cook. Such action, once again, shows that Trump cares little for the established rulebook and in response markets have reacted badly, with long-dated government bonds falling in value.
Returning to Powell and even if Trump does not remove him from office prematurely, with his term due to end in May 2026, Trump will be able to appoint his successor and it is feared he will appoint someone who will follow the President’s instructions on interest rates.
This could lead to interest rates being kept too low, providing short term economic gains, but longer term risks of inflation. A politically motivated appointment could undermine the Fed’s credibility, increasing the risk of rising inflation and market instability.
UK: Fiscal Burden and No Easy Answers
With neither Republicans nor Democrats publicly concerned with the US’ growing deficit, the UK is mired in it. Political discourse is dominated by debt and deficit concerns, with little room for bold economic moves, given frequent discussions over Rachel Reeves’ tax and spending plans.
Labour entered last year’s election positioning itself as the party of sound economic management, promising to reduce the deficit through growth. However, once in office, the party introduced tax hikes, such as the rise to National Insurance Contributions, to address a “fiscal black hole.” These measures, together with the rise to minimum wage, were unpopular with the business community and have contributed to slowing economic growth, complicating the Chancellor’s goal of balancing the books.
Since the budget, Labour’s strategy has shifted toward spending cuts. But internal resistance has made implementation difficult. Backbench MPs forced a U-turn on winter fuel allowance cuts, followed by another reversal on welfare reforms that would have saved a projected £5 billion. As a result, Reeves finds herself cornered. Tax hikes have hurt growth, spending cuts are politically untenable, and further borrowing risks market backlash reminiscent of the Liz Truss mini-budget crisis.
The government’s preferred solution - higher growth - is ideal but elusive. With few options left, more tax increases in the upcoming budget seem the most likely outcome.