The coming period represents a pivotal turning point for the US economy, where the new administration's ambitious economic projections intersect with a harsh fiscal reality. The latest Congressional Budget Office (CBO) report serves as a resounding alarm bell, shaking the foundations of US fiscal projections for the next decade. As President Donald Trump enters his second term, the US faces a complex fiscal landscape: a ballooning federal deficit, public debt nearing historic peacetime levels, and new economic policies that may exacerbate this decline rather than address it.
This article aims to provide a comprehensive analysis of the CBO report, reviewing the alarming figures, dissecting the drivers behind this decline, comparing official projections with the current administration's optimism, and ultimately examining the potential impacts on investors and the global economy, while also offering critical perspectives on possible solutions.
A First Look at the Budget Amid Political Changes
The Congressional Budget Office (CBO) report comes at a critical and sensitive time. Following an election that forced the US economy to adapt to new programs and policies favoring rapid economic growth, the report presents the hard facts of the matter, setting aside campaign slogans. The picture it paints is not merely a reflection of the current situation, but a prediction of a future fraught with financial turmoil if drastic measures are not taken.
The report highlights a persistent and ongoing deterioration in the US fiscal position. This deterioration is not the result of a temporary emergency, but rather the structural outcome of years of increased commitment spending, particularly on social programs, coupled with an expansionary tax system. The greatest challenge facing policymakers now is how to balance the desire for robust growth rates exceeding 3% with the urgent need to control a public budget burdened by debt that is growing at a faster rate than the economy.
Dissecting the Numbers: Deficits and Debt Over a Decade
Looking at the quantitative data presented in the CBO report reveals the perilous nature of the current trajectory. The Bureau of Economic Research projects that the federal deficit in fiscal year 2026, President Trump’s first full year in his second term, will reach approximately 5.8% of GDP. This figure is nearly identical to that of 2025, which saw a massive deficit of $1.775 trillion.
However, the real concern lies in the future trajectory. Instead of declining as a percentage of GDP—as typically occurs during periods of economic recovery—the report projects an average increase to 6.1% over the next decade, with the deficit jumping to 6.7% by 2036. These projections directly contradict the goal set by Treasury Secretary Scott Bissett, who sought to reduce the deficit to 3% of GDP. The gap between the target (3%) and the projection (6.1%) underscores that current policies, on paper, are not translating into actual fiscal stability.
As for the national debt, the picture is even bleaker. Public debt is projected to rise from approximately 101% of GDP currently to nearly 120% by 2035. Reaching such a high ratio in an advanced economy like the United States, without a major world war or a devastating financial crisis, sets a dangerous precedent. This level of debt constrains the government’s ability to respond to future emergencies and makes the entire economy vulnerable to interest rate and inflation shocks.
Drivers of Decline: The Big Three Factors
The CBO report breaks down the reasons behind this fiscal slide into three key, interconnected factors: demographic pressures, new legislation, and the negative impact of trade policies.
The Aging Burden: Social Security and Medicare
The first and most dominant factor is demographics. The United States is experiencing rapid population aging, with the number of "baby boomers" nearing full retirement. This demographic shift means a massive increase in the number of beneficiaries of Social Security and Medicare.
These programs, classified as mandatory spending, consume an increasing share of the federal budget annually. As the workforce contributing to these programs shrinks relative to the number of retirees benefiting from them, a structural deficit is generated that cannot be addressed simply by raising taxes or cutting recreational spending. A complete overhaul of these programs is required to ensure their sustainability. The cost of healthcare, which is rising at rates exceeding general inflation, further fuels the budget deficit.
The "One Big Beautiful Bill Act": The Double Bill
The second factor is directly related to the legislative actions of the new administration and the Republican Party. The One Big Beautiful Bill Act is a classic example of how politics can impact public finances. This law combines seemingly contradictory fiscal policies: large tax cuts intended to stimulate growth, and additional spending on other items.
From an economic analysis perspective, while the tax cuts may theoretically stimulate economic activity, their short-term impact on revenue is clearly negative. The CBO estimates that this law alone will increase the deficit by $1.4 trillion between 2026 and 2035. This enormous sum represents borrowing from the future to finance current stimulus, a gamble entirely dependent on achieving unrealistic growth rates to offset the tax losses.
Tariffs: A Double-Edged Sword
The third factor is the higher tariff policy adopted by the Trump administration. These policies are promoted as a way to increase federal revenue and protect domestic industries. The report estimates that these tariffs could generate up to $3 trillion in additional revenue.
However, the CBO analysis presents a more pessimistic and nuanced view. Tariffs ultimately act as a tax on consumers and importing businesses. The report anticipates that these policies will contribute to higher inflation rates between 2026 and 2029. Higher inflation means lower purchasing power for households, which reduces consumption, the primary driver of the US economy. Moreover, higher inflation will force the Federal Reserve to keep interest rates high for longer, increasing the cost of servicing government debt and slowing private investment. Consequently, the additional revenue from tariffs may be partially or entirely offset by the resulting economic slowdown.
Conflicting Visions: Administration Optimism vs. CBO Realism
One of the most striking aspects highlighted in the report is the significant gap between the US administration’s economic projections and those of independent experts at the CBO.
The Trump administration advocates a highly optimistic scenario, projecting economic growth of 3% to 4% in 2026, with the possibility of first-quarter growth reaching 6%. This optimism rests on the assumption that tax cuts and deregulation policies will unleash the private sector.
In contrast, the CBO report argues that this optimism lacks a realistic basis. The Bureau projects real GDP growth of only 2.2% in 2026, subsequently declining to an average of 1.8% over the decade. This decline reflects several difficult realities:
- First, the impact of restrictive immigration policies. Immigration has been a major driver of labor force growth in the United States in recent years. Restricting immigration means a contraction in the labor supply, which raises wages (positive for workers) but increases costs for businesses and limits the overall productive capacity of the economy (negative for growth).
- Second, the report emphasizes that large fiscal deficits themselves hinder long-term growth. The principle of "crowding out" is at play here; the government borrows heavily from the financial markets to finance its deficits, driving up bond yields and making borrowing more expensive for private companies, thus reducing their investment in expansion and development.
Broader Economic Impacts: Beyond the Numbers
The repercussions of these escalating deficits and debt extend far beyond the government books, impacting the lives of citizens and the stability of global financial markets.
1. Fiscal Crowding Out
As the cost of servicing the debt (i.e., the interest paid on government bonds) increases, the federal budget is swallowing up enormous sums that could be directed toward investment in infrastructure, education, scientific research, and clean energy. The budget is becoming "crowded" with expenditures that do not generate future economic value (such as interest payments), at the expense of capital expenditures that boost productivity. This means that future generations will bear the burden of debt used to finance present consumption, rather than to build their future.
2. Inflation and the Future of Interest Rates
The report asserts that inflation will not return to the 2% target before 2030. This situation puts the Federal Reserve in a difficult position; cutting interest rates too quickly could reignite inflation, while keeping them high would stifle economic growth and put pressure on the labor market. For investors, this translates to a “higher for longer” environment, a scenario that increases recession risks.
3. Risks of US Treasury Bonds
US Treasury bonds are considered a safe haven globally, but a deteriorating financial situation could begin to change this perception. For those who maintain the attractiveness of these bonds, the US government may have to significantly raise yields to attract lenders, especially as foreign central banks (such as China and Japan) reduce their purchases of these bonds. Higher yields mean higher borrowing costs for everyone, from homeowners looking to buy property to startups.
4. Geopolitical and Trade Dimensions
Internationally, the US deficit and tariff policies pose a threat to global trade stability. Potential trade wars with China and Europe not only affect commodity prices but could also disrupt supply chains and reduce global efficiency. Furthermore, the strong dollar, fueled by high US interest rates, is draining liquidity from emerging markets, putting pressure on their economies and exacerbating global financial instability.
Jonathan Burks of the Bipartisan Policy Center describes this situation as "an unprecedentedly large deficit in a developing economy during peacetime," arguing that continuing down this path threatens US national security, as it weakens the country's ability to address external challenges.
Possible Solutions: Between Political Realism and Economic Necessity
Faced with this looming financial cloud, experts have proposed several solutions, but most clash with the current political realities.
1. Revenue Enhancement
From a purely economic perspective, raising taxes, especially on the wealthy and large corporations, is a straightforward way to close the gap. However, this solution directly contradicts the economic doctrine of the Republican Party and the Trump administration, which believes that high taxes stifle growth. Any attempt to raise taxes would face fierce opposition in Congress, making it a difficult solution to implement in the near term.
2. Spending Cuts
Another option is to reduce government spending. The Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, has had some success in cutting federal expenditures, with reductions estimated at between $1.4 and $7 billion. While this may seem like a large sum at first glance, it is a drop in the ocean compared to an annual deficit approaching $2 trillion. For the cuts to be effective, they would have to affect major programs like Social Security and Medicare, a politically risky path given the popularity of these programs among voters.
3. Growth Solution
The administration is betting on a third solution: achieving unrealistic growth rates (3-4%) that would expand the tax base without raising taxes. However, as the CBO report pointed out, this scenario requires productivity improvements that won't happen overnight. Furthermore, restrictive immigration policies contradict the need for additional labor to achieve this growth.
“This is an urgent warning,” warns Michael Peterson of the Peterson Foundation (GFOA). He emphasizes that politicians must make “debt stabilization” a central part of their campaigns and public discourse in 2026 and beyond. Without broad political consensus on the need for fiscal consolidation, debt will continue to rise until it reaches a point of no return.
Conclusion: Is there hope for a correction?
The CBO report paints a bleak and discouraging picture of the US economy without radical intervention. The current trajectory toward a deficit exceeding 6% of GDP and debt approaching 120% poses an existential threat to the long-term financial stability of the United States.
However, the report itself offers an opportunity for correction. Recognizing the problem is the first step toward solving it. As interest in topics like “US federal deficit 2026” and “rising US debt” increases on search engines and financial media platforms, the public and investors are becoming more aware of the scale of the risks.
Success in addressing these challenges will depend on the ability of political leadership to move beyond campaign slogans and adopt realistic policies that combine stimulating growth with fiscal discipline. This may require a reassessment of immigration policies to ensure a stable workforce, adjustments to tariffs to avoid inflation, and perhaps, though difficult, some structural changes to government spending.
The U.S. economy remains highly resilient and possesses tremendous innovative capabilities. This report is not a death knell, but rather a roadmap for the challenges ahead. The response to these challenges will determine whether the next decade will be one of fiscal decline or one of restructuring that puts the United States on a sustainable path to growth and prosperity. For investors and analysts, keywords such as "CBO 2026 Outlook" and "Trump's economic policies" will remain closely watched, as every policy decision in the coming period will have an immediate impact on financial markets and investment portfolios worldwide.
