The US federal budget deficit reached nearly $291 billion in July, 20% higher than the corresponding month in the previous year. While this figure is a monthly snapshot, it contributes to a larger and more concerning year-to-date trend. For the first 10 months of fiscal year 2025, the cumulative deficit has climbed to over $1.6 trillion, marking a 7% increase from the prior year.
In July, total government outlays surged by 10% to a record high for the month, reaching approximately $630 billion. Meanwhile, revenues increased by a modest 2.5%, totaling $338.5 billion. Notably, the revenue growth was modest despite a fourfold increase in tariff receipts, which rose to $28 billion last month.
One of the reasons the US budget deficit has widened is the soaring interest payments on the over $37 trillion national debt. The outgo on interest payments surpassed $1 trillion in the first 10 months of the current fiscal year.
Interest costs might fall if the Fed cuts rates
In his much-anticipated address at the Federal Reserve’s annual Jackson Hole Economic Symposium, Chairman Jerome Powell signaled a potential shift in monetary policy, opening the door to a possible interest rate cut in the coming months. While refraining from making a definitive commitment, Powell’s remarks were widely interpreted by financial markets as a strong hint that a rate reduction could be on the table at the Fed’s September meeting.
If interest rates fall from these levels, it would help lower the interest costs on the US government’s burgeoning debt pile.
The US budget deficit has been running at elevated levels
Notably, the US budget deficit hit a record high of $3.13 trillion in the fiscal year 2021. The surge was understandable as the economy needed support during the pandemic. The deficit came down to $2.77 trillion in the fiscal year 2022. It fell further to $1.38 trillion in the next fiscal year, and while it was much below the previous year, it was significantly higher than in pre-pandemic times, when the deficit was contained below $1 trillion. However, in the fiscal year 2024, the budget deficit increased to $1.8 trillion.
Several leading economists and fund managers have been warning about the soaring fiscal deficit and ballooning US national debt. At Berkshire Hathaway’s annual meeting earlier this year, chairman Warren Buffett warned that US debt has reached unsustainable levels.
Many fear that the fiscal path that the world’s biggest economy has been pursuing since the COVID-19 pandemic is unsustainable, and the country needs to bring down its burgeoning fiscal deficit that has surpassed its national GDP.
CBO estimates that tariffs would balance tax cuts under OBBBA
According to a recent report from the Congressional Budget Office (CBO), President Trump’s tariffs are projected to reduce the US deficit by approximately $4 trillion over the next decade. Of this, $3.3 trillion is expected from the revenues from tariffs, while the remaining is on account of interest savings due to lower borrowings.
This finding marks a major change from a previous CBO estimate in June, which had forecast a reduction of around $3 trillion over the same period. The upward revision is a result of new tariffs that have been implemented since the previous report, as well as higher-than-expected revenue collections.
The CBO’s report has sparked considerable discussion, particularly because the projected tariff revenue could help offset the deficit-increasing effects of other recent policies. The Congressional Budget Office had previously estimated that the “One Big Beautiful Bill Act” (OBBA), a tax-cut and spending package passed earlier this year, would widen the deficit by $3.4 trillion over the next decade. The new tariff projections nearly cancel out that increase, a point that has been touted by the administration as a validation of its trade policies.
However, the CBO emphasizes that its estimates are subject to significant uncertainty. The projections assume that the current tariffs will remain in effect permanently. However, ongoing trade negotiations and international legal challenges could lead to changes in these policies.
CFBR expects the US budget deficit to rise after OBBBA
Meanwhile, the Committee for a Responsible Federal Budget (CRFB), a nonpartisan organization that advocates for fiscal responsibility, has increased its deficit forecast. The watchdog now expects a cumulative deficit of $22.7 trillion between fiscal year 2026 and 2035, which is almost $1 trillion higher than its January forecast.
CFBR estimates that the OBBBA, which includes significant tax cuts and new spending, will add $3.4 trillion to the deficit over the next decade. While tariffs may partially offset this, the net effect of the legislation is still a substantial increase in the national debt.
The CRFB notes that interest rates have remained higher than previously projected by the CBO. As the national debt continues to grow, higher interest rates make the cost of servicing that debt a much larger expense. In their analysis, the CRFB projects that interest payments on the debt will rise to $1.8 trillion by 2035, a significant increase that will add trillions to the deficit over the decade.
Tariffs might face legal scrutiny
While the CRFB acknowledges the revenue from tariffs, its analysis includes a crucial alternative scenario. This scenario considers the possibility that a recent US Trade Court ruling, which found a significant portion of the tariffs illegal, is upheld. If this were to happen, the projected revenue from tariffs would be drastically reduced, potentially adding another $2.4 trillion to the deficit over the next decade. This uncertainty leads the CRFB to forecast a much higher potential deficit than the CBO’s baseline.
Credit rating agencies have downgraded the US sovereign debt
The high budget deficits and soaring debt pile have prompted credit rating agencies to cut the US sovereign credit rating. The US lost its last top credit rating in May after Moody’s cut the country’s sovereign credit rating one notch to Aa1 from Aaa. The rating agency joined its peers in slashing the US credit rating amid concerns over unsustainable US fiscal debt and the rising cost of financing the deficit.
Credit rating agencies downgrading US sovereign debt is hardly a surprise, considering the precarious fiscal position.
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Mohit Oberoi
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