On the CBO’s Twin Outlooks

The fine folks at the Congressional Budget Office (CBO) have been busy bees, releasing not one but two reports on US fiscal policy’s projected effects Wednesday! Oh what fun! And as per usual, coverage is playing fast and loose with the details, throwing around big numbers with little context. While we think this is all moot for stocks, considering these forecasts are opinions and exercises in straight-line math, understanding what they do and don’t say is key to assessing whether sentiment matches reality.

The reports in question aim to assess the budgetary effects of new tariffs and the House’s “Big Beautiful Bill” to (among other things) extend 2017’s tax cuts. If you take most of the corresponding headlines at face value, you will get the impression that the House bill increases the deficit by $2.4 trillion … but that this is ok, because the tariffs cut it by $2.5 or $2.8 trillion, depending on the CBO’s forecasting methodology. Big number, bad, but made better by another big number. Eek? Woohoo?

We say: None of the above.

First off, despite what numerous outlets claimed, the CBO doesn’t project the tax bill adding $2.4 trillion to “the deficit” in the way people would normally interpret that language—it doesn’t raise the annual budget deficit from $1.8 trillion in fiscal 2024 to $4.2 trillion in 2034. Instead, the CBO projects that if the House bill were to take effect, the total of all deficits from 2025 through 2034 would be $2.4 trillion higher than it would be if Congress did nothing.

For 2025, the CBO projects spending cuts would exceed revenue cuts, so the deficit would be $107.6 billion smaller than its baseline do-nothing scenario. In 2026, it anticipates the deficit would be $484.5 billion larger. In 2027, $536 billion larger. Sum every year’s projected change from the do-nothing scenario, and that is how you get to $2.4 trillion. It is a projected $2.4 trillion debt increase. Not annual deficit.

But, again, the CBO is saying debt would be $2.4 trillion higher than it would otherwise be if Congress does nothing. Here, “doing nothing” means 2017’s temporary tax cuts sunset—a tax hike. Is it really news to anyone that if Congress were to cut taxes instead of raise them, a nonpartisan watchdog using straight-line math and not trying to estimate the economic effects would project a debt increase? Because that is what this is. The CBO states plainly that this analysis doesn’t include its “analysis of the macroeconomic effects” of the House bill, because this analysis isn’t yet done. They just ported over all the economic assumptions from their last semiannual forecast. There is a lengthy history of the CBO underestimating the revenue effects from tax legislation—like the very 2017 Tax Cuts and Jobs this “Big” thing aims to extend. According to one recent analysis, the CBO understated revenues by a mere $1.5 trillion.^[i] When you tax something less, you tend to get more of it—and vice versa.

Similar issues dot the tariff study coverage. It doesn’t actually project the annual deficit falling by $2.5 trillion or, once its estimated economic effects are taken into account, $2.8 trillion. Here, too, that figure is the sum of all the projected annual deficit reductions. Not a massive annual windfall.

It is also not really worth the digital paper it is printed on, which isn’t a knock on the CBO. The problem here is that tariffs are a rapidly moving target. The CBO based its analysis on tariffs implemented between January 6 and May 13. That doesn’t include reciprocal tariffs, which are theoretically set to take effect next month if the Trump administration doesn’t make deals. It doesn’t include the potential for China tariffs to rise again if the temporary deal to cut them lapses. It doesn’t include the doubled steel and aluminum tariffs, which took effect Wednesday. It doesn’t include whatever the heck may be in whichever trade deals the administration may ink. As CBO Director Phillip Swagel stated plainly in his brief to Congress: “CBO’s estimates are subject to significant uncertainty, in part because the Administration could change how the tariff policies are administered.”^[ii]

Another issue: The CBO’s analysis presumes “tariffs will be collected on all affected imports.” But we are already seeing this isn’t the case, as businesses are proving extremely adept at avoiding them. Customs revenue continues undershooting estimates. Full collection just isn’t happening. Here, too: If you tax something more, you tend to get less of it. But these estimates totally discount the real experience in Trump’s first term and the past two months, which we have covered and Fisher Investments founder and Executive Chairman Ken Fisher hammered home in a recent New York Post column.

So no, in our view, tariffs aren’t reason to be massively optimistic about the federal budget, just as the tax bill isn’t reason to be wildly pessimistic. These reports are loose long-term forecasts that can’t account for changing conditions or other variables. This close scrutiny of the House bill can’t account for all the ways the Senate could sand it down, just as the CBO’s analysis of the Inflation Reduction Act in 2021 couldn’t account for all the ways Congress is now trying to scrap many of its spending provisions.

All this stuff is a moving target. In our view, the forecasting is a political exercise, not a rigorous economic one, and not anything investors should get worked up over for good or ill. In this case, the cheerful and fearful headlines seem off in equal measure, which is a wash. Mostly, we think this all just shows how much uncertainty there is right now … and how stocks would probably benefit from clarity.