Trump’s tariffs to cut US deficits by US$2.8 trillion while raising inflation and reducing household wealth
The Congressional Budget Office (CBO) stated that US President Donald Trump’s sweeping tariff plan would reduce federal deficits by US$2.8tn over 10 years, but it would also shrink economic output and fuel inflation.
The formal analysis, as reported by The Globe and Mail, projected that the country’s real GDP will be 0.6 percent lower by 2035, and consumer prices will rise 0.9 percent by 2026.
The CBO warned in a published letter to US Senate Democrats that inflation will increase by an annual average of 0.4 percentage points in 2025 and 2026, reducing purchasing power for households and businesses.
The letter, cited by ABC News, added that both consumer and capital goods will become more expensive, which will negatively affect overall demand.
Although the CBO analysis was completed before a federal court struck down Trump’s use of emergency powers to impose tariffs, the court allowed the administration to continue collecting them during the appeal process, according to AP News.
The analysis also excluded the recently implemented 50 percent tariffs on steel and aluminum and the trade deal with the UK, which remains only an agreement in principle.
As per ABC News, the model includes a 30 percent tariff on Chinese imports and a temporary 10 percent reciprocal tariff on most trading partners, which is set to expire within weeks.
The long-term economic impact is also compounded by retaliatory tariffs from other countries, which the CBO said contribute to reduced investment and productivity.
The CBO noted, as reported by AP News, that the trade-off for reducing deficits would be a decline in household wealth.
While tariffs are expected to bring in significant revenue, they are essentially paid by US consumers.
As per The Globe and Mail, the CBO clarified that foreign countries do not pay import taxes—US consumers do.
Despite criticism, Trump continues to promote tariffs as a revenue tool.
In January, he stated that planned tax cuts would be offset “with tariffs, and much more, from countries that have taken advantage of the US for years.”
Trade adviser Peter Navarro stated, “Trump’s fair-trade policies shift the tax base away from income taxes alone to tariffs.”
Still, the projected tariff revenue of US$2.8tn is less than half of the US$6tn previously promised by Navarro.
The tariff policy is closely tied to Trump’s tax proposal under the “One Big Beautiful Bill Act,” which is forecast to increase the deficit by US$2.4tn over the same 10-year period.
Democratic opposition remains strong.
As per The Globe and Mail, Senate Budget Committee ranking member Jeff Merkley stated, “Trump is betraying the people who bought his lie that he would bring down prices.”
US Senate Minority Leader Chuck Schumer added that the tariffs “hurt America’s economic stability and create mayhem for families and small businesses.”
The CBO also observed that the impact of tariffs will vary across income groups.
While price hikes for goods like appliances and cars may disproportionately affect high-income households, lower-income earners who rely on means-tested government transfers could be shielded, since those transfers are indexed to inflation.
As reported by CNBC, the broader economic context also shows signs of slowing.
Private sector job creation for May fell to 37,000, the lowest monthly total since March 2023, according to the ADP jobs report.
The US Federal Reserve’s latest Beige Book noted that “economic activity has declined slightly” since April, as businesses and consumers voiced concerns about tariff-driven price increases.
The Penn-Wharton Budget Model, cited by AP News, predicted a long-term GDP reduction of 6 percent and a 5 percent decline in wages from the tariffs, reinforcing concerns around productivity and wealth erosion.
The Organisation for Economic Co-operation and Development recently forecast that US economic growth will slow to 1.5 percent by 2026.
Adding to the uncertainty, Trump’s frequent social media announcements on tariff changes—including pausing duties on most nations for 90 days and raising Chinese import tariffs to 125 percent—have made it difficult to assess the full policy impact.
As the CBO noted, the estimates remain “subject to significant uncertainty,” particularly given the lack of modern precedent for tariff hikes of this scale.
