President Trump’s tariffs and massive GOP tax cuts are set to have competing effects on the economy, according to the latest outlook report from the Congressional Budget Office (CBO), which shows an increased stagflationary mix for the rest of 2025.
Tariffs are expected to rein in economic growth, while tax cuts are expected to boost it through increases in capital stock and productivity.
While tax cuts and work requirements in the One Big Beautiful Bill Act will boost labor supply in the long run, the CBO projected Trump’s immigration crackdown will shrink it in the short run and is already contributing to a dramatic drop in hiring across the economy, with an average of just 29,000 jobs being added per month since June.
The outlook for this year is weaker than previously forecast, while the outlook for next year is stronger. Gross domestic product (GDP) is expected to grow by 1.4 percent this year, down from a 1.9 percent prediction made in January. The World Bank predicted 1.4 percent growth in June, while the International Monetary Fund predicted 1.9 percent growth in July.
Real GDP growth is 0.5 percentage points lower in the latest CBO projections, primarily because “the negative effects on output stemming from new tariffs and lower net immigration more than offset the positive effects of provisions of the reconciliation act this year,” the official budget scorer said.
Generally speaking, tariffs restrain growth by adding costs for producers and consumers, while tax cuts push it forward by boosting investment and consumption.
GDP growth is higher for 2026 than previously forecast at 2.2 percent, versus the 1.8 percent January prediction.
Meanwhile, inflation is set to rise to a 3.1 percent increase this year and to 2.4 percent next year. Both of those numbers are higher than the previous forecast. Inflation ticked up to a 2.9 percent annual increase in August from 2.7 percent in July in the latest reading of the consumer price index released this week.
Tariffs and tax cuts are also having competing effects on the public deficit, which is almost at $2 trillion for this fiscal year, though the number is expected to be closer to $1.8 trillion by year’s end. The tax cut law is set to add $3.4 trillion to the national deficit over the next 10 years and shrink tax revenues by $4.5 trillion, while tariffs, if left in place, would shrink deficits by $4 trillion.
Customs duties revenues have been hitting records in recent months on the new tariffs, swelling to $30 billion for the month of August — about three times what they were prior to the new trade regime.
The CBO projected in January that the total debt held by the public will increase from around 100 percent of GDP, where it is now, to almost 120 percent by 2035 — though that forecast did not include the effects of tariffs.
Investors and economists have worried increasingly about how to finance rising U.S. deficits and have warned, as the Federal Reserve has come under increasing political pressure from the Trump administration, of monetization of the public debt. That could cause a capital flight from the U.S., similar to what happened when bond yields soared in April when Trump first announced his new tariffs.
“We may have exhausted global investors’ willingness to accumulate limitless [Treasury] bills at low interest rates,” Harvard economist Jeffrey Frankel said Friday. “The U.S. may become like others, where eternal deficits eventually require monetization and currency depreciation.”
The DXY dollar index is down about 11 percent since the beginning of the year while the nominal broad dollar index is down about 7 percent — a depreciation that flummoxed economists as tariffs are theoretically supposed to boost domestic currencies rather than erode their value.
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