Trump’s 2025 Fiscal Policy Gamble and Multiplier effect: Economic Boom or Global Risk?

 Iva Aleksic

Fiscal policy plays an important role in shaping economies. Governments use taxation, public spending, and borrowing to manage growth, control inflation, and respond to economic shocks. However, when a large economy like the United States makes big fiscal changes, the effects extend far beyond its borders. A well-designed policy can fuel economic expansion, while a poorly managed one can lead to rising deficits, inflation, or financial instability.

One of the most important economic principles behind fiscal policy is the multiplier effect. The fiscal multiplier measures how much total economic output (GDP) changes in response to an increase or decrease in government spending or taxation. It helps policymakers predict the effectiveness of fiscal policy. The higher multiplier effect the higher GDP growth, because it means that each dollar of government spending or tax cuts creates a larger overall increase in economic output. 

MPC (Marginal Propensity to Consume) is the fraction of extra income that consumers spend rather than save. (A higher MPC means a stronger multiplier effect, as more money circulates through the economy). 

How strong is the multiplier effect in Trump's 2025 fiscal agenda, and will it lead to sustained economic growth or financial risks? In early 2025, President Donald Trump introduced a bold fiscal policy agenda, including $4.5 trillion in tax cuts, $2 trillion in spending reductions, and new tariffs on imports from Canada, Mexico, and China. These measures aim to stimulate economic expansion, reduce government intervention, and support American industries. But will this agenda help US boost their economy or lead to a global risk? Answer lies in the multiplier effect.

Trump’s $4.5 trillion tax cut package follows the logic of supply-side economics, which argues that lowering taxes encourages businesses to expand, create jobs, and fuel economic activity. If businesses spend more the multiplier effect should boost GDP growth. However, the actual impact depends on who benefits from the tax cuts. For example, if businesses and high-income earners receive the largest tax cuts, the impact on economic growth depends on how they use the extra income. If they spend more (expanding production, hiring workers, increasing wages), the multiplier effect could be strong. However, if they save a significant portion (e.g. to buy stocks) the demand is smaller, and the multiplier effect is lower. On the other hand, if tax cuts are more targeted toward middle- and lower-income households that are more likely to spend the additional income, the multiplier effect would increase.

To balance the budget they set, the Trump administration has proposed $2 trillion in spending cuts, mainly targeting social welfare programs such as Medicaid, food assistance, and education. This is important because government spending on social programs typically has a high fiscal multiplier, as recipients tend to spend the money immediately on necessities. Cutting these programs reduces the purchasing power of lower-income households, which could lower consumer demand and slow GDP growth.

Lastly, Trump’s new tariffs on imports from Canada, Mexico, and China are meant to protect U.S. industries by making foreign goods more expensive. The idea is that if imported products cost more, people will buy more American-made goods, boosting domestic economy. However, tariffs can also raise costs for both companies and consumers, potentially weakening economic growth rather than strengthening it. The multiplier effect of tariffs depends on whether they encourage more U.S. production or simply make goods more expensive.

So, will Trump’s fiscal plan be remembered as a successful economic strategy or a warning about the risks of tax cuts, spending reductions, and protectionism? The coming years will reveal the true impact of this high-stakes economic experiment.

References:

Financial Times (2024) Trade tensions and tariffs: How Trump's policies impact global markets. Available at: https://www.ft.com/content/ce9e7e59-015e-4d29-9402-fa15930460a9 (Accessed: 25 February 2025).

Financial Times (2024) Trump’s $4.5tn tax cuts and $2tn spending reductions: Economic impact and risks. Available at: https://www.ft.com/content/2c473393-35fb-479d-8bba-236a1a98087c (Accessed: 25 February 2025).

Financial Times (2024) US fiscal policy: Debt, deficits, and the long-term outlook. Available at: https://www.ft.com/content/c2e48c17-e3a1-4967-b421-a7d857ae1b7b (Accessed: 25 February 2025).

University at Albany (2014) Multiplier Effect. Available at:  https://www.albany.edu/~bd445/Economics_301_Intermediate_Macroeconomics_Slides_Spring_2014/Multiplier_Effect.pdf (Accessed: 26 February 2025).

About the Author

Iva is a second-year Business Management student with a strong interest in economics, sustainability, and business analytics. If you share similar interests, feel free to reach out at bs23680@qmul.ac.uk.