War spending surges combined with tariff revenue declines, Besent's 3% deficit target may be "difficult to achieve"

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The U.S. fiscal outlook is facing dual pressures. A ruling by the Supreme Court overturning the broad range of tariffs implemented during the Trump era, combined with additional spending driven by the war in Iran, has made Finance Minister Besant’s goal of reducing the deficit-to-GDP ratio to around 3% increasingly difficult to achieve.

The Supreme Court’s decision has deprived the federal government of an important revenue source. According to economists cited by Bloomberg, the tax revenue that could be generated by subsequent replacement tariffs will be far less than what the previous tariffs brought in. At the same time, the war in Iran has increased the government’s spending needs and, through rising oil prices, has intensified inflation pressures—further squeezing the Federal Reserve’s room to cut rates—and rate cuts are an effective way to reduce the interest burden of the deficit.

These shocks have come one after another, worsening an already grim fiscal trajectory. The nonpartisan Congressional Budget Office (CBO) predicted last month that, over the next decade, the U.S. deficit-to-GDP ratio will remain around 6%, and this forecast has not yet incorporated the impact of recent developments in the near term. Against the backdrop of continued deterioration in the external environment, Besant’s envisioned goal of reducing the deficit rate to 3% before 2029 has become even more challenging.

A double blow hits both revenue and expenditure sides of the fiscal balance

The tariff ruling directly impacts revenue. After the Supreme Court overturned Trump-era large-scale tariffs, relevant revenue sources were substantially weakened; whether replacement tariffs can make up the shortfall remains uncertain. Bloomberg reports that tariff revenue peaked in October last year.

Expenditures are also under pressure. The Pentagon has requested an additional $200 billion for the Middle East conflict. Meanwhile, soaring oil prices have pushed up inflation expectations, further cooling market expectations for Federal Reserve rate cuts—which would have helped, as rate cuts are one of the key mechanisms to reduce the deficit: by lowering debt interest costs.

Maya MacGuineas, chair of the nonprofit, nonpartisan Committee for a Responsible Federal Budget, said the tariff ruling and the war both further derail an already worsening fiscal path. The ruling will reduce federal revenue, and whether replacement tariffs can offset the shortfall remains uncertain; meanwhile, the war will undoubtedly lead to significant additional spending.

Besant downplays the impact and remains committed to a growth-driven path

Besant’s public statements regarding these risks have been relatively restrained. On March 22, in an interview with NBC, he stated, “We have sufficient funds to finance this war,” citing annual military appropriations of over $1 trillion as the basis. In a statement accompanying the release of the government’s annual financial report, Besant said, “Through growth, we can gradually bring the federal deficit down to 3% of GDP,” and added that “this administration inherited an unsustainable fiscal trajectory.”

Regarding deficit figures, Besant has recently frequently cited data showing last year’s deficit rate falling below 6%. However, this improvement is partly due to a one-time adjustment in the accounting treatment of federal student loans, artificially lowering the calculated expenditure. Bloomberg reports that institutions such as JPMorgan estimate that, excluding this factor, the actual deficit rate would again exceed 6%.

Long-term structural pressures are even more severe

Although the tariff ruling and the Iran war have attracted short-term attention, Jessica Riedl, a fiscal policy expert at the Brookings Institution, pointed out that over a longer time horizon, the impact of these two factors may be far less than that of the structural drivers of the deficit. She said: “Given the current $1.8 trillion budget deficit, the Iran conflict has not yet caused a catastrophic blow at the budget level.”

The more fundamental pressure stems from automatic growth in entitlement spending driven by population aging. As the number of retired Americans continues to rise, Social Security and Medicare expenditures steadily increase. The Congressional Budget Office (CBO) forecast from February this year projects the deficit rate will rise to 6.7% by 2036, a figure that has not even factored in the impact of the Iran war, and assumes tariffs remain unchanged—an assumption already invalidated by the Supreme Court’s ruling.

Michael Peterson, CEO of the Peter G. Peterson Foundation, said: “Borrowing trillions of dollars at such a rapid pace, with no plan to address it, is the very definition of unsustainability.”

Debt levels and interest costs continue to climb

The deterioration of the U.S. fiscal situation has deep historical roots. Large-scale fiscal stimulus during the pandemic, combined with subsequent inflation surges, created a “double blow”: on one hand, massive pandemic-related spending increased debt levels; on the other hand, rate hikes aimed at curbing inflation sharply raised debt interest costs. Layered on top of this, the continued growth in entitlement spending driven by the rising retiree population has further intensified fiscal pressures.

Currently, the total U.S. public debt is roughly equal to the size of GDP. The Congressional Budget Office (CBO) forecasts that this year, publicly held federal debt will reach $32 trillion, about $3 trillion higher than at the start of Trump’s new administration. Net interest payments are expected to exceed $1 trillion in fiscal year 2026, accounting for more than half of the total budget deficit estimate.

So far, there are no signs in the market of refusal to purchase U.S. Treasury bonds. However, since the Middle East conflict began, the benchmark 10-year U.S. Treasury yield has risen by approximately 40 basis points. During the last Congress hearing, Besant admitted, “It’s very difficult to predict when, or if, the market will develop resistance to Treasury supply.”

Jessica Riedl summarized the shared dilemma facing both parties in one sentence: “Neither party has seriously proposed any plan to stop the flow of deficits.”