The surge in war spending combined with reduced tariff revenue may make Besant's 3% deficit target "difficult to achieve."

The U.S. fiscal outlook is facing dual pressures. The Supreme Court's overturning of the broad tariffs from the Trump era, combined with additional expenses from the conflict in Iran, makes it increasingly difficult for Treasury Secretary Janet Yellen to achieve the goal of reducing the deficit-to-GDP ratio to the 3% range.

The Supreme Court's ruling has deprived the federal government of an important source of revenue. According to economists cited by Bloomberg, the tax revenue generated by subsequent alternative tariffs is expected to fall far short of previous levels. Meanwhile, the conflict in Iran has increased government spending demands and exacerbated inflationary pressures through rising oil prices, further constraining the Federal Reserve's ability to cut interest rates—an effective way to alleviate the burden of deficit interest payments.

These impacts have come in quick succession, worsening an already dire fiscal path. The nonpartisan Congressional Budget Office (CBO) predicted last month that the U.S. deficit-to-GDP ratio will average around 6% over the next decade, a forecast that does not yet account for the latest developments. Against the backdrop of a deteriorating external environment, Yellen's envisioned goal of "reducing the deficit rate to 3% by 2029" is becoming increasingly challenging.

Dual Blows Strike Fiscal Revenue and Expenditure

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

Expenditure is also under pressure. The Pentagon has requested an additional $200 billion for the conflict in the Middle East. Meanwhile, soaring oil prices have raised inflation expectations, further cooling market expectations for Federal Reserve interest rate cuts—cuts that would have helped reduce one of the core drivers of the deficit: debt interest payments.

Maya MacGuineas, president of the non-profit, nonpartisan Committee for a Responsible Federal Budget, stated, the combination of the tariff ruling and the war has further diverted an already deteriorating fiscal trajectory from the right path. The ruling will reduce federal government revenue, and it is far from clear whether alternative tariffs can make up the difference; the war will clearly bring about a significant increase in spending.

Yellen Downplays the Impact, Sticks to Growth-Driven Path

Yellen's public statements regarding these risks have been relatively restrained. In an interview with NBC on March 22, she stated, "We have ample funds to support this war," citing over $1 trillion in annual military appropriations as evidence. In a statement accompanying the government's annual financial report, Yellen said, "Through growth, we can gradually reduce the federal deficit to 3% of GDP," and noted that "this administration inherited an unsustainable fiscal trajectory."

In interpreting the deficit data, Yellen has frequently referenced 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, which artificially lowered the expenditure calculation. According to Bloomberg, institutions like JP Morgan estimate that if this factor is excluded, the actual deficit rate would again exceed 6%.

Long-Term Structural Pressures Are More Severe

Although the tariff ruling and the Iran war are currently in the spotlight, Jessica Riedl, a fiscal policy expert at the Brookings Institution, pointed out that from a longer time perspective, the impact of these two factors may be far less than the structural drivers of the deficit. She stated: "In terms of the current $1.8 trillion budget deficit, the Iran conflict has not yet constituted a devastating blow at the budget level."

The more fundamental pressure comes from the automatic growth of welfare spending driven by an aging population. As the number of retired Americans continues to rise, Social Security and Medicare expenditures are steadily increasing. The Congressional Budget Office (CBO) predicted in February this year that the deficit rate will rise to 6.7% by 2036, a forecast that does not even take into account the impact of the Iran war and assumes that tariff rates remain unchanged—an assumption that has been undermined by the Supreme Court's ruling.

Michael Peterson, CEO of the Peter G. Peterson Foundation, stated: "Borrowing trillions at such a rapid pace without any plan to address it is, by definition, unsustainable."

Debt Levels and Interest Expenditures Continue to Rise

The deterioration of the U.S. fiscal situation has historical roots. The massive fiscal stimulus during the pandemic, combined with the subsequent surge in inflation, has created a "double whammy": on one hand, huge pandemic-related expenditures have inflated the debt stock, while on the other hand, interest rate hikes to curb inflation have significantly raised the cost of debt interest. This dual impact, compounded by the continuous expansion of welfare spending driven by the growing retired population, has made fiscal pressure increasingly difficult to alleviate.

Currently, the U.S. public debt is approximately equal to the total GDP. The Congressional Budget Office (CBO) predicts that this year, the federal debt held by the public will reach $32 trillion, an increase of about $3 trillion since the beginning of Trump's new administration. Net interest expenditures are expected to exceed $1 trillion in the fiscal year 2026, accounting for more than half of the overall budget deficit estimate.

So far, there are no signs in the market of a refusal to purchase U.S. Treasury bonds, but since the Middle East conflict, the yield on the benchmark 10-year U.S. Treasury bonds has risen by about 40 basis points. Besant admitted during last year's congressional hearing, "It is very difficult to judge when and whether the market will develop resistance to the supply of Treasury bonds."

Jessica Riedl succinctly pointed out the common dilemma of both parties: "Neither party has seriously proposed any plan to stop the flood of deficits."

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