The One Big Beautiful Bill’s Real Deficit

President’s Trump’s “one big beautiful bill” is now law and will certainly raise the federal debt over the next 10 years, but probably not by the $3.4 trillion that the Congressional Budget Office (CBO) forecasts.

More likely the deficit impact will be around $1.7 trillion, according to an AMG analysis. Here’s why:

In January, before the new law was even proposed, the CBO put together budget and deficit projections for the coming 10 years based on current laws and government policies on spending and taxation. The expectation was that tax cuts enacted by the 2017 Tax Cut and Jobs Act would be phased out starting at the end of this year. The CBO’s most recent forecast of a $3.4 billion deficit reflects the difference between the January estimate and new projections including the fiscal impact of the new law.

There is a catch to this approach. Mandatory spending, such as Social Security, Medicare, and government employee pensions, does not require annual appropriations and is projected according to payments required by law. The payments are formulaic, assumed to continue indefinitely, and typically include inflation adjustments as well. Discretionary spending, such defense, justice and homeland security, which requires annual congressional appropriations, is assumed to be maintained by future congressional action at levels equivalent to current real expenditures. That is, the projected levels of current spending are adjusted upward to provide a constant inflation-adjusted status, in effect embedding the current spending policy within the baseline projections indefinitely. In distinct contrast, tax receipts are projected to be collected only according to the law as it presently stands. In particular, if certain provisions of current tax law expire in future years, the revenues they would generate are simply assumed to vanish. No provision is made for maintaining consistent revenues from future expiration of tax provisions, even if it is highly likely that such tax provisions will be extended. In effect, tax projections are based on current law, rather than current policy.

As a result of the required baseline projection procedures, the CBO’s 10-year estimate of $3.4 trillion, which has been widely reported as the increase in the deficit that will result from the new legislation, significantly overstates its fiscal effect. The problem is that, in keeping with the then current law, major 2017 tax cuts were forecast to expire starting at the end of 2025. The expiration of such provisions would have created massive increases in both personal and business income taxes. Yet, it was probably the worst kept secret in Washington that Congress and the Trump Administration would never let that happen. A better estimate of the impact of the one big beautiful bill is to reduce the $3.4 trillion estimate by the projected cost of the expiring provisions of the 2017 tax cuts, which were extended and enhanced in the new law. Such calculation reduces the 10-year fiscal deficit impact to $1.7 trillion.