Tariffs and Tax Cuts Fuel $1 Trillion Deficit Surge, Debt Rises to $41 Trillion

The U.S. federal budget deficit is projected to exceed initial forecasts by nearly $1 trillion over the next decade, according to the Committee for a Responsible Federal Budget (CRFB). The cumulative deficit from fiscal 2026 to 2035 is expected to reach $22.7 trillion, surpassing the Congressional Budget Office’s January 2025 forecast of $21.8 trillion. This revision accounts for the fiscal impacts of recent tax and spending legislation, including the One Big Beautiful Bill Act, as well as the ongoing Trump administration’s broad tariff regime.

The CRFB estimates that the new legislation will increase the deficit by $4.6 trillion through 2035, including $3.4 trillion in extra import duty revenue from tariffs. These tariffs, currently in place, are credited with partially offsetting the costs of tax cuts and expanded federal spending. Despite these revenues, the deficit remains on an upward trajectory. The projected annual deficit is expected to rise from $1.7 trillion in fiscal 2025 to $2.6 trillion in 2035, representing 5.6% and 5.9% of GDP, respectively.

The administration’s tariff strategy has also introduced significant uncertainty. Under a high-risk alternative scenario, the deficit could rise by nearly $7 trillion, driven by the potential invalidation of key Trump-era tariffs and the extension of temporary tax cuts included in the One Big Beautiful Bill Act. If these tariffs are struck down, the U.S. could lose $2.4 trillion in revenue over the next decade. Meanwhile, if tax cuts on items such as overtime pay, Social Security income, and car loan interest are extended, the deficit will rise by an additional $1.7 trillion.

Interest costs on the national debt are a major contributor to the rising deficit. The CRFB projects net interest payments on the debt will total $14 trillion over the decade, increasing from nearly $1 trillion in 2025 to $1.8 trillion in 2035. These payments are a growing share of federal spending and are sensitive to changes in interest rates. The CRFB notes that if 10-year Treasury yields remain at their current level of 4.3% instead of declining to 3.8% as projected by the CBO, interest costs could rise by an additional $1.6 trillion through 2035.

The national debt-to-GDP ratio is also projected to rise significantly. It is expected to climb from 118% in the CBO baseline to 120% under the CRFB’s base scenario and 134% under the alternative scenario. These figures highlight the long-term fiscal challenges facing the U.S. government, as policymakers continue to prioritize short-term political objectives over structural reforms.

The One Big Beautiful Bill Act, signed into law by President Donald Trump in July 2025, included a $5 trillion increase to the debt ceiling, pushing the national debt above $41 trillion. While this move averted a potential default and associated market disruption, it did not address the broader fiscal imbalances in the budget. Analysts have criticized the lack of meaningful discussions on fiscal sustainability, emphasizing that the U.S. has moved further from responsible budgeting practices.

In response to the growing deficit and debt concerns, the Trump administration has maintained that tariff revenues are a critical component of its fiscal strategy. Treasury Secretary Scott Bessent has indicated that tariff revenue could exceed $300 billion annually, with proceeds directed toward reducing federal debt rather than direct rebates to citizens. This approach has been supported by S&P Global Ratings, which recently reaffirmed the U.S.’s AA+ long-term credit rating, noting that tariff revenues help offset the fiscal impact of recent tax and spending policies.

However, the widespread implementation of tariffs has also triggered international trade tensions. Brazil, for instance, has rejected a U.S. trade investigation into its digital policies, while the European Union has hinted at potential retaliatory measures. These developments underscore the complex interplay between fiscal policy and global trade relations, as the U.S. seeks to balance economic protectionism with international obligations.

The CRFB’s analysis highlights the need for a comprehensive and bipartisan approach to fiscal reform. Without addressing the structural drivers of the deficit—such as entitlement spending, tax cuts, and interest costs—the U.S. risks entering a period of prolonged fiscal instability. Policymakers are increasingly aware of the challenges, yet progress on meaningful reform remains elusive. As the debate continues, the public and private sectors will need to monitor both domestic fiscal developments and the evolving trade landscape for potential economic implications.

Source: [1] US budget deficit forecast $1 trillion higher over next decade watchdog says (https://www.reuters.com/business/us-budget-deficit-forecast-1-trillion-higher-over-next-decade-watchdog-says-2025-08-20/) [2] US debt tops $37 trillion and the 'big, beautiful bill' allows it to rise trillions higher (https://www.foxbusiness.com/economy/us-debt-tops-37-trillion-big-beautiful-bill-allows-rise-trillions-higher) [3] Trump 2.0 tariff tracker (https://www.tradecomplianceresourcehub.com/2025/08/15/trump-2-0-tariff-tracker/) [4] US keeps AA+ rating as tariffs aid fiscal outlook - Yahoo Finance (https://finance.yahoo.com/news/live/trump-tariffs-live-updates-us-keeps-aa-rating-as-tariffs-aid-fiscal-outlook-200619517.html) [5] Trump expands steel and aluminum tariffs to 407 more product categories (https://www.cnbc.com/2025/08/19/trump-trade-steel-aluminum-tariffs-.html) [6] EUR USD | Euro US Dollar (https://www.investing.com/currencies/eur-usd)