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The writer is an FT contributing editor, chief economist at American Compass and writes the Understanding America newsletter
Surging deficits and expiring tax cuts have placed the Republican party in an unenviable position. Simply extending all the tax cuts would add trillions of dollars in debt. But, as the party has become more attuned to the interests of the working class, the deep spending cuts it has traditionally championed alongside lower tax revenue have become less palatable. Proposed cuts to Medicaid, the programme that provides healthcare to the poor, have become the focal point in the clash.
The version of Donald Trump’s One Big Beautiful Bill Act passed by Republicans in the House of Representatives hews more closely to the old playbook, reducing revenue by nearly $4tn over 10 years and seeking to mitigate the deficit impact with a range of spending cuts, primarily an $800bn reduction in spending on Medicaid. The Senate’s proposed Medicaid cut would be even deeper.
Some Republican members of Congress and conservative commentators have expressed strong opposition to these cuts, led by Senator Josh Hawley, who calls the approach “both morally wrong and politically suicidal.”
This is the wrong fight. The unavoidable reality of America’s fiscal crisis, in which the higher interest payments from rising deficits and debt now exceed defence spending and drive deficits and debt even higher, is that Congress will need to dramatically increase taxes, dramatically cut spending or do both in moderation if it wants to stanch the budget bleeding.
The traditional Republican approach of cutting spending and using the savings to pay for even bigger tax cuts, concentrating pain at the bottom of the income ladder and gains at the top while leaving deficits higher than before, is indeed morally wrong and politically suicidal. But so is living in a budget fairyland that attempts to deny trade-offs altogether, pursuing unaffordable tax cuts while disclaiming the need for spending discipline. Bankrupting the country, it should go without saying, does not serve the working class.
What conservative populists can and should do is demand fiscal responsibility but push for different trade-offs. Spending cuts must go towards their intended purpose: deficit reduction, not tax cuts. Tax rates should be going up, not down — for those least affected by spending cuts and most able to afford it.
And when it comes to spending cuts, Medicaid must indeed be on the table. The programme’s cost has risen faster than Medicare’s or Social Security’s over the past 25 years. It has doubled as a share of GDP while spending on other income security programmes has fallen over the same period.
The fundamental problem is not with the goal of providing healthcare to the poor, but with Medicaid’s match-based structure. Each state decides the contours of its own coverage and then receives matching federal funds. Unsurprisingly, states have skewed their own budgets towards this spending, well beyond the point of diminishing returns. Indeed, the results of the best randomised, controlled trial of Medicaid coverage, published in the New England Journal of Medicine in 2013, found that it “generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of healthcare services.”
The “provider tax,” on which the Senate has specifically set its sights, is the quintessential illustration. States have raised the fees that they pay providers through Medicaid and established taxes to collect back the higher payments. Paying the provider $110 instead of $100 and then collecting $10 extra in tax may seem pointless, but if the federal government is covering half the fee, $55 rolls in from Washington instead of $50. Suffice it to say, this does not improve patient care.
Would constraining that practice affect benefits? Fewer resources flowing into the state probably means fewer going towards healthcare. But absolute opposition to any reductions is arbitrary, not principled. If the provider-tax loophole did not exist, would populists push to create it for the benefit of constituents? The position cannot be that more spending is always better.
Politicians determined to vindicate the interests of workers should demand that Congress get deficits under control and that everyone share the burden. Modest spending reductions in programmes like Medicaid, paired with modest rate increases for the top tax brackets, would be a good way to start. Trump and Treasury secretary Scott Bessent have both indicated their openness to raising taxes on high earners. A true populist would accept nothing less.
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