By David Lawder and Richard Cowan
WASHINGTON, Feb 11 (Reuters) – The U.S. budget deficit will grow slightly in fiscal 2026 to $1.853 trillion, the Congressional Budget Office forecast on Wednesday, showing that on balance, President Donald Trump’s economic policies are worsening the country’s fiscal picture amid low economic growth.
The CBO said that the deficit for fiscal 2026 – Trump’s first full fiscal year in office – will be about 5.8% of GDP, about where it was in fiscal 2025, when the deficit was $1.775 trillion.
But the U.S. deficit-to-GDP ratio will average 6.1% over the next decade, reaching 6.7% in fiscal 2036 – far above U.S. Treasury Secretary Scott Bessent’s goal to shrink it to around 3% of economic output.
“Those sustained large deficits are historically unusual, given that the unemployment rate is projected to remain below 5%” for the 10-year budget window, CBO Director Phillip Swagel said in a statement.
A major difference is that the CBO forecasts rely on significantly lower economic growth projections than the Trump administration, pegging 2026 real GDP growth at 2.2% on a fourth-quarter comparison basis, fading to an average of about 1.8% for the rest of the decade.
Trump administration officials in recent weeks have projected robust growth in the 3-4% range for 2026, with recent predictions that first-quarter growth could top 6% amid rising investments in factories and artificial intelligence data centers.
CBO’s forecasts assume that tax and spending laws and tariff policies in early December remain in place for a decade. The government’s fiscal year starts on October 1.
While revived investment tax incentives and bigger individual tax refunds provide a boost in 2026, the CBO said that this is attenuated by the drag from larger fiscal deficits and reduced immigration that slows growth of the labor force.
NOMINAL BOOST FROM AI
The non-partisan budget referee agency projects only a nominal GDP boost from artificial intelligence productivity gains, about 10 basis points per year. This cuts back a linchpin of the Trump administration’s demands for lower interest rates that has also been adopted by Federal Reserve chair nominee Kevin Warsh.
The CBO projects interest rates on 10-year Treasury notes to remain roughly where they are now or a little higher, 4.3% in 2027, a blow to Trump hopes for sharply lower consumer borrowing costs. It forecasts the Fed making only a single quarter-point rate cut this year, even with Warsh potentially leading the central bank by June.
The fiscal 2026 deficit is about $100 billion or 8% more in CBO’s current projections than it was in the agency’s January 2025 projections, and the cumulative deficit over the 2026–2035 period is $1.4 trillion, or 6% greater.
Trump’s “One Big Beautiful Bill” that extended 2017 tax cuts and slashed outlays on social programs such as Medicaid, will boost consumer spending and private investment this year, CBO said. That legislation will add $4.7 trillion to U.S. deficits over the 10-year budget window, while reduced immigration will add another $500 billion, according to the forecasts.
Added revenue from Trump’s tariffs will reduce deficits by about $3 trillion, including economic effects and lower debt payments, CBO said.
FAR HIGHER INTEREST COSTS
The forecasts show some deficit reduction from discretionary spending cuts, with a fiscal 2026 $16 billion reduction compared to CBO’s forecast in this category from January 2025, rising to about $139 billion by fiscal 2035. But these cuts, which include those from the much-touted informal Department of Government Efficiency, are dwarfed by the growth in net interest costs on the ballooning federal debt, which are set to more than double to $2 trillion by fiscal 2035 from $970 billion in fiscal 2025.
Higher Medicare and Social Security costs for the aging Baby Boom generation are also big drivers of the deficit growth, CBO said.
Total public debt is set to grow to $56.152 trillion, or 120% of GDP in 2036, compared to $30.172 trillion, or 99% in fiscal 2025. In fiscal 2030, the U.S. debt-to-GDP ratio will top its 1946 peak of 106% that was fueled by World War Two debt.
“There’s no sugar-coating it: America’s fiscal health is increasingly dire,” said Jonathan Burks, economic policy director at the centrist Bipartisan Policy Center in Washington. “Our debt is now 100% of GDP, and rather than pumping the brakes, we are accelerating. These large deficits are unprecedented for a growing, peacetime economy.”
(Reporting by David Lawder and Richard Cowan; Additional reporting by Howard Schneider; Editing by Andrea Ricci)
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