Trade Deals Imply Significantly Lower Budget Deficits

The US agreement with the EU setting a 15% tariff on most goods sets a floor of at least 15% on all imports with many categories like steel and aluminum having tariffs of 50%.  We now estimate that the effective tariff on imports will come out at 20% after all negotiations or unilateral tariffs are imposed.  A 20% average tariff would imply over $350 billion of tax revenue for the US treasury on an annual basis. 

All CBO deficit forecasts for the OBBBA excluded increase from incremental tariffs.  Using an assumption of $350 billion of tariff revenue we now estimate the fiscal 2026 budget deficit will be only $1.3 trillion representing only 4.1% of GDP. This level of deficit implies a sustainable level of debt as a percent of GDP as nominal GDP grows approximately 5% which results in the ratio of total debt to GDP declining gradually over time.  The extra $350 billion of revenue will lower the budget deficit and avoid crowding out private investment.  An increase in private investment of $350 billion would increase the sustainable GDP growth rate by .2%.