Surging war expenses combined with tariff reductions threaten to make Besson's 3% deficit target "difficult to achieve."

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The outlook for U.S. fiscal policy is facing dual pressures. The Supreme Court's overturning of the Trump-era broad tariffs, coupled with extra costs from the Iran conflict, has made it increasingly difficult for Treasury Secretary Bessent to achieve the goal of lowering the deficit-to-GDP ratio to the 3% range.

The Supreme Court's ruling has deprived the federal government of a vital source of income. According to Bloomberg citing economists, the subsequent replacement tariffs are expected to generate much less revenue than before. Meanwhile, the Iran conflict has increased government spending demands and, through rising oil prices, has exacerbated inflationary pressures, further reducing the Fed's room to cut rates—cuts that had been an effective way to ease the interest burden of the deficit.

These shocks are coming one after another, intensifying an already severe fiscal path. The nonpartisan Congressional Budget Office (CBO) predicted last month that over the next decade, the U.S. deficit-to-GDP ratio will average around 6%, and this prediction has not yet accounted for the impact of the latest developments. As external conditions continue to deteriorate, Bessent’s proposed goal of lowering the deficit ratio to 3% before 2029 becomes increasingly difficult.

Double Blow Continues to Hit Fiscal Balance

The tariff ruling directly impacts the revenue side. After the Supreme Court overturned the Trump-era large-scale tariffs, the related tax revenues have been substantially weakened, and it remains unclear whether replacement measures can fill the gap. According to Bloomberg, tariff revenues peaked in October last year.

The expenditure side is also under pressure. The Pentagon has requested an additional $200 billion for the Middle East conflict. At the same time, soaring oil prices have raised inflation expectations, cooling market expectations for Fed rate cuts—cuts that would have helped to shrink one of the deficit’s core drivers: debt interest expenditure.

Maya MacGuineas, president of the non-profit, nonpartisan Committee for a Responsible Federal Budget, stated that both the tariff ruling and the war have further pushed an already worsening fiscal trajectory off course. The ruling will reduce federal government revenues, and whether replacement tariffs can make up the difference is far from clear; the war will undoubtedly bring a massive increase in spending.

Bessent Downplays Impact, Sticks to Growth-Driven Path

Bessent’s public statements on these risks are relatively restrained. In a March 22 NBC interview, he said, “We have ample funds to finance this war,” citing the over $1 trillion annual military appropriations. In the government’s annual financial report statement, Bessent said, “Through growth, we can gradually bring the federal deficit down to 3% of GDP,” adding that “this administration inherited an unsustainable fiscal trajectory.”

When interpreting deficit data, Bessent has recently repeatedly cited last year’s drop in the deficit ratio to below 6%. However, this improvement was partly due to a one-off adjustment in the accounting for federal student loans, which artificially reduced spending values. Bloomberg reports that JPMorgan and other institutions estimate that if this factor were excluded, the actual deficit rate would again exceed 6%.

Long-Term Structural Pressure Is Deeper

Although the tariff ruling and the Iran war are attracting attention in the short term, Jessica Riedl, fiscal policy expert at the Brookings Institution, pointed out that over a longer time frame, the impacts of these two factors are likely far less than structural deficit drivers. She said: “When it comes to the current $1.8 trillion budget deficit, the Iran conflict has not yet dealt a devastating blow at the budget level.”

The more fundamental pressure comes from automatic growth in welfare spending due to an aging population. As the number of retired Americans continues to rise, Social Security and Medicare spending are expanding steadily. The Congressional Budget Office (CBO) forecast in February this year indicated that the deficit ratio would rise to 6.7% in 2036, and this forecast does not even include the impact of the Iran war and assumes the tariff rate remains unchanged—which the Supreme Court ruling has already invalidated.

Michael Peterson, CEO of the Peter G. Peterson Foundation, said: “Borrowing a trillion, then another trillion at such a rapid pace without any plan to address it is the very definition of unsustainability.”

Debt Size and Interest Expenditure Keep Rising

The deterioration in the U.S. fiscal situation has historic roots. The massive fiscal stimulus during the pandemic, combined with subsequent soaring inflation, created a “double blow”: on one hand, huge anti-pandemic spending pushed up debt stock, and on the other, rate hikes to curb inflation sharply increased debt interest costs. This dual shock, added to expanding welfare spending driven by an aging population, has made fiscal pressures even harder to eliminate.

Currently, the U.S. public debt size is about equal to GDP. The Congressional Budget Office (CBO) estimates that this year, federal debt held by the public will reach $32 trillion, an increase of about $3 trillion from the start of the new Trump administration. Net interest expenditure is expected to exceed $1 trillion in fiscal year 2026, accounting for more than half of the estimated overall budget gap.

So far, the market has not shown signs of refusing to buy U.S. Treasuries, but since the Middle East conflict, the benchmark 10-year Treasury yield has climbed by about 40 basis points. Bessent admitted during a congressional hearing last year, “It’s very difficult to judge when, or if, the market will become resistant to the supply of Treasuries.”

Jessica Riedl summed up the dilemma of both parties: “Neither party has seriously proposed any solution to stem the flood of deficits.”

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