A big, but not beautiful, US budget bill

Is the Trump administration’s “One Big Beautiful Bill” a cause for market celebration? As it stands, the proposal worsens the US budget deficit, although tariff revenues should provide some cushion. While the White House argues that tax cuts will spur growth and offset additional spending, we see limited economic upside.

The House of Representatives’ reconciliation bill was narrowly adopted last week and is now heading to the US Senate. President Trump exerted considerable pressure on lawmakers due to widespread concerns within the Republican party. It is likely that several provisions will be reshaped in the Senate, before the bill will be signed into law in the summer - most likely around August.

As it stands, the bill would roll over 2017’s Tax Cuts and Jobs Act (TCJA), raise the limit on the deduction of states and local taxes, and temporarily exempt tips and overtime pay from taxes. At the same time, the bill would cut spending on government programmes, such as food stamps for the poorest and Medicaid, as well as substantially scale down the clean energy tax credits under the Biden administration era’s Inflation Reduction Act (IRA). The latter provisions are among the ones most likely to be altered in the Senate, as many Republican states currently benefit from IRA subsidies.

The tax cuts incorporated in this bill were supposed to be positive news countering damage to financial market sentiment after US tariffs. The White House says that the budget would not increase the US deficit, on the grounds that the tax cuts will boost economic growth.

The lion’s share of the tax cuts come from simply extending the Tax Cuts and Jobs Act

Our analysis is considerably more moderate. The lion’s share of the tax cuts come from simply extending the TCJA: this measure was widely expected and entails no actual change in the cash flow of households. Therefore, rather than an increase in spending, it simply prevents a deceleration. State and local tax deductions mostly benefit households with annual income of more than USD 200,000 per annum: while they account for large fraction of US consumption, it is also a segment of the population that is slower to spend any gains. Tips and overtime pay are comparatively more stimulating for economic growth, but they affect only a small fraction of the population from a macro standpoint.

A widening deficit

Cumulative additional deficits implied by the bill would amount to around USD 3 trillion over a decade, compared with an end-2024 debt held by the public of USD 29 trillion. These cumulated deficits assume that some temporary tax cuts in the current version of the bill will expire in 2028-2029 as planned. If they were extended, as it is currently the case for the TCJA, the total additional deficit brought about by the bill would be closer to USD 5 trillion over a decade.

Import tariffs will soften these budget implications of the bill - offsetting part of the widening deficits. Also taking into account some indirect effects on government revenue, tariffs should bring in around USD 2.5 trillion over a decade, with larger contributions in the first years. It remains uncertain how much of these tariff revenues would be spent supporting sectors that face retaliation by foreign trading partners, as happened to agriculture during the first Trump administration. Moreover, this total impact largely depends on whether these tariffs remain in place over a decade, or whether they are reduced or reversed, possibly by a future administration.

We estimate that a deficit of 6.3% of GDP in 2024 will briefly improve in 2025 before reaching 7% in 2026, and then widen further in 2027

Taking into account all of these factors, we estimate that a deficit of 6.3% of GDP in 2024 will briefly improve in 2025 before reaching 7% in 2026, and then widen further in 2027 (see chart 1). In terms of debt held by the public to GDP, and absent further fiscal reforms, the bill combined with tariff revenues and long-term trends such as an ageing population, would increase this ratio from slightly less than 100% at the end of 2024 to 120% a decade from now, we estimate.

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Finally, an important provision of the bill raises the US debt ceiling by USD 4 trillion, avoiding the triggering of a US technical default. While this is obviously a positive outcome, we expect this ceiling to become binding again before early 2027, as for the debt ceiling it is the overall US deficit which matters, rather than the marginal one implied by the bill discussed above.

Dismissing default risk

Given the Republican party’s Senate majority, we expect the provision in the current bill that increases the debt ceiling to be approved. As long as this happens, there is no risk of the US defaulting. Financial markets recognise that the risk is minimal: US 5-year Credit Default Swap (CDS) spreads, which reflect the cost of sovereign risk insurance, have increased only moderately - from 36 basis points in March 2025 to 47 basis points at the time of writing. 

…the bill would keep upward pressure on US funding costs, especially at the long end

As this bill remains broadly in line with our macro base case scenario, we maintain our forecasts for US growth and inflation unchanged. All else being equal, the bill would keep upward pressure on US funding costs, especially at the long end. In January, we had integrated higher-for-longer US yields in the near term, taking account of fiscal uncertainties. At this point, however, we think that US yields embed a significant term premium - in other words, yields compensate investors for the risk of holding longer-dated bonds. Together with our low US growth forecast for this year of 1.2%, and our expectation for monetary policy normalisation, we believe that US Treasuries offer attractive valuations, while acknowledging that some short-term volatility is inevitable with the passing of the bill to the US Senate. Our preferred US Treasury maturities are around 5 years, which we expect to benefit most from the growth slowdown and rate cuts by the Federal Reserve in 2025.