The Congressional Budget Office on Wednesday forecast the U.S. budget deficit will increase modestly in fiscal 2026, reaching $1.853 trillion. That figure translates to roughly 5.8% of gross domestic product, close to the 2025 shortfall of $1.775 trillion.
In its longer-term outlook the CBO projects the deficit-to-GDP ratio will average about 6.1% over the next decade and rise to 6.7% by fiscal 2036. Those projections stand in contrast to the objective articulated by U.S. Treasury Secretary Scott Bessent, who seeks to reduce the deficit-to-GDP ratio to around 3%.
A central reason for the gap between the CBO’s numbers and the administration’s public expectations is differing growth assumptions. The agency assumes real GDP growth of 2.2% in 2026, declining to an average near 1.8% for the remainder of the decade. Administration officials have recently argued that first-quarter 2026 growth could exceed 6% because of rising investment in factories and artificial intelligence data centers.
The CBO’s projected fiscal 2026 deficit is about $100 billion, or 8%, larger than the agency’s January 2025 estimate. Over the 2026-2035 period the CBO now sees cumulative deficits that are $1.4 trillion, or 6%, greater than in its earlier projection.
The CBO attributes a substantial portion of the deterioration in the fiscal picture to recent legislative changes. It says President Trump’s "One Big Beautiful Bill" - which extended tax cuts enacted in 2017 and reduced outlays for social programs such as Medicaid - will lift consumer spending and private investment this year but will add $4.7 trillion to deficits over the 10-year budget window. The agency also estimates reduced immigration will increase deficits by roughly $500 billion during that span.
Partially offsetting those drivers, the CBO expects additional revenue from tariffs to lower deficits by about $3 trillion when accounting for macroeconomic effects and reduced debt service costs.
The report includes a modest productivity upside tied to artificial intelligence. The CBO quantifies a productivity gain from AI at a nominal 10 basis points per year of extra economic output. That projection feeds into broader debates over interest rates: the report notes that 10-year Treasury yields are expected to remain roughly at current levels or a little higher, undermining hopes for substantially cheaper consumer borrowing costs.
On monetary policy, the CBO foresees the Federal Reserve making only a single 25 basis point rate cut this year, even if Kevin Warsh - the Fed chair nominee who has also argued for lower rates tied to productivity gains - assumes leadership by June.
Key points
- The fiscal 2026 deficit is forecast at $1.853 trillion, about 5.8% of GDP, near fiscal 2025’s $1.775 trillion shortfall.
- Over the next decade the deficit-to-GDP ratio averages 6.1%, reaching 6.7% by fiscal 2036 - well above the 3% target cited by Treasury Secretary Scott Bessent.
- Policy changes including the extension of 2017 tax cuts, lower immigration, and tariff revenues are major drivers of the CBO’s deficit path.
Risks and uncertainties
- Economic growth assumptions: The CBO’s lower growth forecast (2.2% in 2026, averaging about 1.8% thereafter) could be proved wrong if near-term investment surges as the administration expects; that would materially affect revenue and deficit projections - with implications for financial markets and interest-sensitive sectors such as housing and consumer credit.
- Interest rate trajectory: The expectation that 10-year Treasury yields will remain roughly where they are or a bit higher, and that the Fed will deliver only one quarter-point cut this year, creates uncertainty for borrowing costs across households and businesses and for fixed-income markets.
- Policy composition: The net fiscal effect of recent legislation and immigration changes raises uncertainty for government spending and for demand in the economy, affecting sectors tied to consumer spending and private investment.