US budget deficit forecast $1 trillion higher over next decade, watchdog says

A budget watchdog, the Committee for a Responsible Federal Budget (CRFB), projects U.S. federal budget deficits will be nearly $1 trillion higher over the next decade than the Congressional Budget Office's (CBO) January forecast, reaching a cumulative $22.7 trillion from fiscal 2026 to 2035. This increase is primarily attributed to recent tax and spending legislation, partially offset by current tariffs, with deficits steadily rising to $2.6 trillion or 5.9% of GDP by 2035 and net interest payments totaling $14 trillion over the decade. CRFB's alternative scenario, which factors in potential tariff cancellations, extended temporary tax cuts, and sustained higher interest rates, warns of nearly $7 trillion in additional deficits, potentially pushing the debt-to-GDP ratio to 134% by 2035, signaling significant fiscal deterioration risks.

Analysis

The Committee for a Responsible Federal Budget (CRFB) projects a significant deterioration in the U.S. fiscal outlook, with federal deficits anticipated to be nearly $1 trillion higher over the next decade than the Congressional Budget Office's January forecast. The updated forecast shows a cumulative deficit of $22.7 trillion from fiscal 2026 to 2035, driven by new tax and spending legislation projected to add $4.6 trillion to the deficit, which is only partially mitigated by an estimated $3.4 trillion in revenue from current tariffs. A critical concern is the escalating cost of debt service, with net interest payments projected to total $14 trillion over the decade and rise to 4.1% of GDP by 2035. The CRFB also outlines a more severe alternative scenario where deficits could increase by an additional $7 trillion if current tariffs are reversed, temporary tax cuts are extended, and interest rates remain at current levels of 4.3% instead of declining. This adverse scenario would push the U.S. debt-to-GDP ratio to 134% by 2035, up from the CBO's 118% baseline, signaling a substantial risk to long-term fiscal stability.

Key Decisions for Investors

• Given that sustained higher interest rates could add $1.6 trillion to deficits over the next decade, investors should anticipate continued upward pressure on long-term Treasury yields and consider reducing exposure to duration-sensitive fixed-income assets.
• The significant divergence between baseline and alternative fiscal scenarios highlights major policy uncertainty; investors should price in higher fiscal risk and monitor legislative developments around tariffs and tax extensions, which could create distinct sector-level winners and losers.
• The projected rise in the U.S. debt-to-GDP ratio to a potential 134% represents a long-term structural negative for the US dollar, warranting consideration of strategic diversification into non-USD assets or currency hedges for long-term portfolios.