The “boomerang” of tariffs has hit the economy hard! CBO confirms that Trump tariffs will create a gap of 200 billion US dollars, and the US deficit will soar to 2.1 trillion dollars in 2026

The Zhitong Finance App learned that the dividends that the US federal government originally expected to rely on tariffs to increase revenue are rapidly fading away at a faster rate than expected. The US Congressional Budget Office (CBO) admits that the sharp reduction in tariff revenue has opened a 200 billion US dollar funding gap for this year's fiscal year.

According to the non-partisan CBO's monthly budget assessment released on Monday, the agency currently expects the 2026 fiscal year deficit to reach $2.1 trillion — higher than its February forecast of $1.9 trillion, when the Supreme Court had yet to reject Trump's iconic tariff plan.

The CBO pointed out that the scale of federal spending this year is basically at the same level as the benchmark set in February, which means that the current round of deficits is almost entirely due to a contraction on the fiscal revenue side.

The CBO estimates that customs and customs tax revenue in 2026 will be reduced by $250 billion compared to previous expectations. This 60% drop comes directly from the Supreme Court ruling on February 20, which determined that the Trump administration has no authority to levy tariffs under the International Emergency Economic Powers Act.

Better-than-expected personal income tax and payroll tax revenue (about $75 billion higher than the February baseline) cushioned the impact to some extent. However, the CBO said that the government's other revenue channels were reduced by about 25 billion US dollars compared to expectations, eventually forming a net revenue gap of about 200 billion US dollars. This gap cannot be explained by the expenditure side alone.

“We have already borrowed an astonishing amount of $1.8 trillion this fiscal year, reaching $431 billion in July alone, which is equivalent to nearly $6 billion a day,” said Maya McGinnis, chairman of the Responsible Federal Budget Committee. “We are moving towards borrowing more than $2 trillion this fiscal year, and none of this happened during the recession. This is extremely abnormal.”

The fluctuating tariff system

In order to fill the fiscal hole caused by the loss of tariffs, the US government hastily changed the basis for taxation, and the whole process was almost temporary and hastily adapted. After the Supreme Court rejected tariffs introduced under the International Emergency Economic Powers Act, the White House first switched to levying tariffs under section 122 of the 1974 Trade Act — the temporary authorization expired on July 24 — and then re-imposed tariffs under section 301 of the same law. The CBO expects that the new tariff system will recover “a significant portion” of the losses, but it will not be able to make up for the full amount.

The monthly financial data intuitively shows the scale of the reversal of the revenue situation. Previously, the monthly net customs tariff revenue had exceeded the same period last year until April; however, as tax refunds related to Supreme Court rulings were issued one after another in May, the data suddenly turned negative.

By July, the amount of customs duties refunded by the government had exceeded the amount collected: the tax rebate for the month reached 36 billion US dollars, while the total amount collected was only 26 billion US dollars, and the net monthly outflow reached 9 billion US dollars. According to CBO statistics, up to now, the US has refunded a total of about 100 billion US dollars in taxes in response to tariffs previously levied through the International Emergency Economic Powers Act, which has expired.

“It's incredible that this huge amount of debt is still just the tip of the iceberg of America's fiscal deterioration,” McGinnis said. “We are about to reach the alarming milestone of a total of 40 trillion US dollars in treasury bonds, and the situation is likely to only worsen.”

She urged lawmakers to set a reasonable fiscal target, such as controlling the deficit at 3% of GDP, and forming a bipartisan committee to achieve that goal. “We can no longer afford to postpone difficult decisions. We must act now.”

The fiscal deficit has been high for a long time

Tariff revenue has shrunk drastically, further worsening the situation, and the US fiscal situation, which has already continued to deteriorate, is becoming more and more serious. According to CBO data, in the first ten months of fiscal 2026, the cumulative US fiscal deficit reached 1.8 trillion US dollars, an increase of 169 billion US dollars over the same period last year; after excluding technical statistical biases (the August 1 payment deadline coincided with a weekend, and some expenses were postponed to July), the cumulative deficit during the year was still 71 billion US dollars higher than the same period of fiscal year 2025.

In July alone, the US fiscal deficit reached 431 billion US dollars, a sharp increase of 140 billion US dollars over the same period last year. Personal tax and payroll tax revenue rose slightly by 31 billion US dollars (11% increase) in the same month, but due to tariff revenue shifting from profit to loss, total US fiscal revenue fell by 5 billion US dollars (1% decrease).

Where are the funds flowing

Expense side: Benefits and interest on debt are the biggest expenses

Since fiscal year 2026, the main forces behind the rise in US fiscal spending are still the three major statutory benefits: social security spending increased by 70 billion US dollars, an increase of 5%; federal health insurance spending rose by 66 billion US dollars, an increase of 8%; Medicaid spending increased by 45 billion US dollars, an increase of 8%; and the three major mandatory benefits programs together increased by 181 billion US dollars, an overall increase of 7%.

Net interest on public debt has now become one of the fastest growing categories in the federal budget. It soared by US$117 billion during the year, an increase of 14%. On the one hand, it is due to the continued rise in total debt, and on the other hand, it is affected by high long-term interest rates.

In addition to this, several agencies' expenses fluctuated due to reasons other than tariffs or benefit plans:

The Ministry of Education's spending fell by $79 billion, or 60%, mainly because the agency confirmed a net reduction in student loan costs of US$53 billion in June 2026, compared to an increase of US$24 billion in July 2025.

The Ministry of Housing and Urban Development increased its spending by $17 billion, or 43%, because it did not repeat the 2025 reduction in the estimated cost of housing loan guarantees.

Environmental Protection Agency spending fell by $20 billion, or 59%, due to a reduction in clean energy grants.

The Small Business Administration increased its spending by $10 billion — about six times last year's total — as the agency raised the estimated cost of outstanding disaster relief loans.

The Ministry of Defense's military spending increased by 39 billion US dollars, or 5%, for personnel and research and development; the Department of Veterans Affairs increased its spending by 34 billion US dollars, an increase of 11%, benefiting from the increase in the number of beneficiaries and rising costs per capita.

Revenue side: sharp drop in corporate taxes

On the revenue side, corporate income tax revenue fell by $89 billion for the year, a 23% drop. The CBO attributed this to the expansion of corporate investment deductions — a decline that should have been offset by increased corporate profits.