The Tax Bill Could Increase Deficits By At Least $2.3 Trillion
Much of the Deficit Reduction Is Pushed to the Latter Half of the Ten-Year Budget Window
Deficits and the national debt are among my top concerns. Getting the deficit and debt under control is the most critical public policy issue facing the United States. Congress's inability to address the drivers of deficits and debt is a dereliction of duty. Democrats and Republicans alike deserve blame for ignoring the problem.
We were reminded late last week of the problem when Moody’s downgraded the United States’ credit rating. In some respects, Moody’s is just behind the curve. Standard and Poor’s downgraded the United States’ credit rating in August 2011 during the debt limit debate that eventually produced the Budget Control Act. Standard and Poor’s downgraded the United States’ credit rating in August 2023, a few months after Congress produced the Fiscal Responsibility Act, which was designed to reduce discretionary outlays by $1 trillion. Of course, discretionary spending isn’t driving deficits and debt. Mandatory outlays–predominantly Social Security and Medicare–and interest on the national debt are the primary drivers.
The most recent projections from the Congressional Budget Office show that mandatory outlays and net interest were 73 percent of federal spending in FY 2024 and are projected to be 78 percent of outlays in FY 2035. Discretionary spending was 27 percent in FY 2024 and is projected to be 22 percent in FY 2025.
As a percentage of gross domestic product (GDP), mandatory outlays were equivalent to 17.1 percent of GDP in FY 2024 while discretionary spending was 6.3 percent. In FY 2033, mandatory outlays are projected to rise to 19.2 percent of GDP.1 Discretionary outlays are projected to fall to 5.3 percent of GDP.
The reconciliation bill–dubbed the “One Big Beautiful Bill Act”–may be on the House floor this week. That’s if House Republican leadership can get the issues related to offsets to reduce the budgetary impact of the tax cuts and the state and local tax (SALT) deduction solved. Interestingly, White House Press Secretary Karoline Leavitt told reporters yesterday that the reconciliation bill “will save $1.6 trillion.”
As luck would have it, the CBO released its score of the reconciliation bill as reported by the House Budget Committee on May 18. What does the CBO say? Well, CBO says the bill will increase budget deficits by $2.3 trillion over ten years. That assumes the spending cuts in the reconciliation bill take effect. There are some details that haven’t been subject to the cost estimate that could change the score.2
From FY 2025 through FY 2029, the reconciliation bill increases budget deficits by $1.771 trillion. From FY 2030 through FY 2034, deficits are increased by $534 billion. This is because most of the deficit reduction is backloaded. For example, as written, the Medicaid work requirements in the House Energy and Commerce Committee title don’t take effect until 2029. The deficit estimates don’t include interest costs to finance the increase in the budget deficit.
But again, this makes the assumption that the spending cuts and other deficit reduction included in the reconciliation bill take effect. Democrats could take back the White House and Congress and simply reverse the provisions that would reduce the deficit in 2029.
Now, the budget resolution providing for reconciliation assumes $2.6 trillion in economic activity under the reconciliation bill. That’s an assumption that isn’t grounded in reality. The White House Council of Economic Advisers also assumes, “The 3.0 percent annual real GDP growth forecast under the Administration’s policies is projected to result in $4.1 trillion in additional revenue over the next 10 years relative to the CBO’s GDP growth projections that assume the expiration of TCJA.” To be clear, Trump didn’t see 3 percent growth from 2017 through 2019. The economy is in an even more precarious position now, in part because of Trump’s trade war.
What can we actually expect? The center-right Tax Foundation projects a budget deficit of $3.3 trillion over ten years, but that is based only on the tax changes produced by the House Ways and Means Committee. The Tax Foundation’s estimate includes macroeconomic effects of tax changes but doesn’t include interest to finance the increase in debt. The Committee for a Responsible Federal Budget estimates $3.26 trillion in increased deficits, including $580 billion in new interest costs.
There’s something else to keep in mind. The CBO has likely underestimated interest costs. The January 2025 budget and economic projections assumed interest rates on the 10-year Treasury note would be 4.202 percent in Q4 of 2024, 4.245 percent in Q1 of 2025, and 4.113 percent in Q2 of 2025. The yield on 10-year Treasury notes was 4.28 percent in Q4 of 2024 and 4.45 percent in Q1 of 2025. Obviously, we’re in Q2 of 2025 right now, so the jury is still out, but the rate is 4.455 percent at the end of May 19.
My point is that any variation in interest rates will increase or decrease federal spending. If interest rates rise, spending to service that debt will increase. For example, a 10 basis point increase in interest rates translates to a $4.1 billion increase in outlays for net interest.3 This assumes 15.4 percent of the share of the debt held by the public rolls over each year. Assuming a 4 percent increase in the share of the debt held by the public, outlays for net interest will rise by $1.291 trillion over ten years under a scenario in which interest rate rises by 0.5 percent, $2.582 trillion under a 1 percent increase scenario, and $5.164 trillion under a 2 percent increase scenario.
Consider how terrible the United States’ debt situation is, combined with increasing outlays for programs like Social Security and Medicare as the population grows older and retires and mounting interest costs, adding more to the debt is a colossally bad idea, regardless of whether Congress is considering spending more money or passing a tax cut.
I’m using the peak mandatory outlays as a percentage of GDP here. In FY 2035, mandatory outlays are projected to be 18.8 percent of GDP.
CBO didn’t estimate the budgetary effects of how the various provisions interact with each other.
This isn’t a projection. It’s meant to be an example of what could happen if interest rates grow substantially higher than the CBO projects.