"3% deficit dream" fades: tariffs setbacks in addition to Middle East war, US Treasury Secretary Bentsen faces fiscal "double squeeze"

Notice that the US Treasury Secretary Berkshen often says that he entered public service because of the growing concerns about US debt at Beijing Dynamic Power. Recent developments over the past few weeks have made these warnings even louder. First, the Supreme Court ruled that President Trump's comprehensive tariff policy is unconstitutional, which was once an important source of revenue for the federal government. Although the government aims to rebuild its trade system through other laws, economists warn that the new levies will bring in much less money than before. In fact, tariff revenue peaked in October last year. Subsequently, Trump's war with Iran has raised the government's expenditure demands and made the growth outlook uncertain, increasing the risk of revenue flow. The Pentagon has requested an additional $200 billion to fund this conflict. Additionally, the surge in oil prices has exacerbated inflationary pressures, curbing market expectations for a Fed rate cut, which could have helped reduce the deficit, a key driving factor. All of this means that Berkshen's goal of reducing the fiscal deficit to below 4% of GDP by January 2029, before Trump leaves office, now seems even more challenging. Prior to the latest news, the non-partisan Congressional Budget Office (CBO) predicted last month that the average deficit rate over the next decade would be around 6%. The US will face historic deficits in the coming years Maya MacKinnes, head of the non-profit, non-partisan Committee for a Responsible Federal Budget (CRFB), said, "The tariff ruling and the war have exacerbated the already terrible fiscal trajectory." "The ruling will reduce federal government revenue, and it is currently unclear whether alternative tariffs can make up for this shortfall. And it is obvious that the war will lead to significant additional costs." In an interview on March 22, Berkshen downplayed the impact of the Iran conflict on the budget, saying "We have enough money to fund this war," and pointed out the strength of annual military appropriations of $1 trillion. In a statement released last Thursday with the government's annual financial report, Berkshen said, "Through growth, we can over time bring the federal deficit down to 3% of GDP." He also said, "This administration inherited an unsustainable fiscal trajectory." In recent months, the Treasury chief has been touting a deficit of less than 6% last year, but this was driven to some extent by one-time changes in the accounting for federal student loans - reducing the calculated value of expenditures. Without considering this change, institutions, including JPMorgan, estimate that the deficit has surpassed 6% again. According to CBO predictions from before the Iran war erupted in February, the deficit will reach 6.7% by 2036. The forecast also assumes that tariff rates as of November will remain unchanged over the next decade, but due to the Supreme Court ruling, tariffs have been reduced - reducing revenue. Meanwhile, the outlook for Trump's tariffs after is unclear. "Running up a trillion after a trillion without a plan at such a rapid pace is the definition of 'unsustainable,'" said Michael Peterson, CEO of the Peterson Foundation, an organization advocating for a sustainable fiscal path. The government may update its fiscal plans and expectations in the annual budget proposal usually released in the spring. Jessica Riedel, a fiscal expert at the Brookings Institution, said that the impact of the Iran war and the Supreme Court tariff ruling may appear insignificant in the face of other long-term deficit-driving factors such as Social Security benefits. "With a current budget deficit of $1.8 trillion, the Iran war has not yet been the end-all for the budget," she said. Double blow After the outbreak of the Covid-19 pandemic in the US and the subsequent surge in inflation, the country's fiscal situation deteriorated rapidly. The massive spending to support the economy impacted by the pandemic increased debt by trillions of dollars, and the need for higher interest rates to curb soaring consumer prices subsequently raised debt servicing costs. This double blow, along with the growing number of retirees in the US bringing strong potential pressures, is steadily pushing up spending on Social Security and Medicare. In the two years before Trump returned to the White House, the deficit exceeded 6% of GDP - an unprecedented situation in a modern period of low unemployment and steady economic growth. The huge deficits mean that the debt burden continues to rise. The current debt level is roughly equal to the US gross domestic product. While there are currently no signs that buyers will initiate a "buyers' strike" against US debt, market participants warn that, at certain times, investors may demand higher yields to continue absorbing federal securities. As of Monday, the yield on the benchmark 10-year US Treasury bond has risen by about 40 basis points since the start of the Iran war. US debt burden expected to hit historic highs Former hedge fund manager Berkshen told legislators last year, "It is very difficult to predict when and if the market will resist US debt supply." The CBO predicted last month that the total amount of debt held by the public will reach $32 trillion this year, up from about $29 trillion at the start of the Trump administration. Net interest payments in the 2026 fiscal year are expected to exceed $1 trillion - accounting for more than half of the estimated total budget shortfall. Riedel said that the lack of political will to address the $25 trillion funding shortfall for Social Security and Medicare over the next decade is at the core of long-term fiscal challenges. "Neither party has a serious plan to stop this flood of red ink."