The US House of Representatives recently passed a budget for the 2025 fiscal year, H.R.1: “One Big Beautiful Bill Act,” or “OBBBA” in shorthand. As devotees of the US fiscal process are well aware, House passage is only one step toward a final budget. The Senate now needs to pass a bill, and reconciling the two versions will likely last well into the summer months.
That makes the House bill very far from a finished product—changes to the details are certain. Still, the budget’s passage paints a clearer picture of the Trump administration’s fiscal priorities and sets a baseline for future negotiations. So, this is an opportune time to update our view of the country’s fiscal trajectory, which is amplifying investors’ concerns about stubborn deficits and rising debt levels.
Proposed Tax-Cut Extension Is Biggest Deficit Driver
The House legislation, in our view, will most likely boost the budget deficit and swell the federal debt burden in the process. Taxes are the government’s revenue source, and if they’re cut more deeply than spending is, the deficit will grow. Estimates of how much deficits will rise are imprecise by nature, but we think a $2 to $3 trillion increase over the next 10 years is a reasonable starting point.
The proposed extension of the Tax Cuts and Jobs Act of 2017 is the biggest deficit driver. Its tax cuts are scheduled to expire at the end of this fiscal year, and an extension could add $3.5 to $4.0 trillion to the deficit. About $800 billion would be offset by cuts in health spending, mainly Medicaid; other cuts target subsidies and tax incentives for green-energy and related projects. Passing certain costs of food stamps and other social programs down to the state level would save a bit more. But in its entirety, the legislation carries a significant net cost from a budgetary perspective.
The bill’s structure also creates future stress points for Congress. To avoid a possible Senate filibuster, the final bill must be advanced using the reconciliation procedure. That path requires the parts of the legislation that expand the deficit to be temporary. The OBBBA tax cuts are front-loaded, taking effect immediately. To offset that impact over a 10-year horizon, the bill proposes future spending cuts, mainly in 2029 and beyond, when the current government won’t have to deal with the political fallout.
Rising Interest Payments Add to Deficit Woes
The net effect of this legislative engineering: the biggest expansion of the budget deficit will come in the near term. It’s the projections for these years that carry the most confidence; future administrations will have their own opportunity to shape budgets to their own political preferences. In the meantime, the deficit will likely be climbing—significantly—over the next few years.
Of course, more than legislated spending and revenue play into the fiscal picture. The rising stockpile of government debt—and the growing cost of paying interest on it—will boost the deficit by more than the amount projected from the OBBBA impact alone (Display). According to Committee for a Responsible Federal Budget estimates, the government debt-service cost will climb by more than $100 billion annually in the next few years, bringing total debt service to well over $1 trillion per year in the near term. That’s a lot more than the government spends on defense.
When combining the change in the primary deficit with higher interest payments over the next few years, the net impact on the overall budget becomes clear. The proposal under discussion today would swell the budget deficit to almost 8% of GDP over the next decade (Display).
Climbing Treasury Yields Reflect Market Concern
Absent the injection of some level of fiscal discipline in Washington, DC, the deficit will continue to expand, the debt burden will expand and the cost of servicing government debt will climb. Financial markets have taken note of the debt burden: the yield on 30-year Treasury bonds has risen by more than 50 basis points so far this year and now stands above 5%. Those higher yields stiffen the challenge, making it costlier for the government to issue new debt. To break this cycle, politicians must act.
It will require some combination of spending cuts and tax increases to put the Federal budget house in order and on a more sustainable trajectory, and neither of these options is politically popular. Until the administration and Congress are willing to make painful choices, we don’t expect the US fiscal situation to improve.
The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams, and are subject to change over time.
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