Tariffs imposed on trading partners by the Trump administration would shrink the economy and increase inflation but also would reduce budget deficits by $2.8 trillion from 2025 to 2035, the Congressional Budget Office says in a letter to Democratic leaders in the Senate.
“By lowering federal borrowing, those tariff collections would reduce federal outlays for interest by $0.5 trillion,” CBO says in the letter. “As a result, in the absence of any effects on the U.S. economy, the changes in tariffs would reduce total deficits by $3.0 trillion altogether.” The reduction in the size of the economy brings that number down to $2.8 trillion.
The analysis was conducted at the request of Senate Minority Leader Chuck Schumer, D-N.Y., and the ranking members of the Finance Committee, Ron Wyden of Oregon, and the Budget Committee, Jeff Merkley, also of Oregon.
The estimates “are subject to significant uncertainty, in part because the administration could change how the tariff policies are administered,” the letter said. CBO’s projections “reflect the assumption that the tariffs will be collected on all affected imports, with no exemptions beyond those currently specified.”
“[B]ecause the United States has implemented no increases in tariffs of this size in many decades, there is little relevant empirical evidence on their effects,” CBO said.
The office said it did not take into account current trade negotiations between the U.S. and UK. “Those negotiations represent an agreement in principle and did not yet represent legally binding changes in tariff rates as of May 13,” the letter said.
CBO said it expects other countries to impose additional retaliatory tariffs.
“U.S. trading partners are probably waiting for negotiations to play out before retaliating fully,” the letter said. “Even so, the value of U.S. exports targeted by those tariffs is expected to be lower than the value of imports targeted by U.S. tariffs.”
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Higher tariffs will reduce investment and productivity, which will be “partially offset by increases in resources available for private investment resulting from the reduction in federal borrowing,” CBO said, estimating that “on net, real (inflation-adjusted) economic output in the United States will fall as a result.”
The increased tariffs will shrink the size of the U.S. economy, CBO said. Both consumer goods and capital goods will cost more, reducing consumers’ and businesses’ purchasing power.
The result will be “temporary upward pressure on inflation,” CBO said, estimating that inflation will rise by roughly 0.4 percentage points over 2025 and 2026 relative to the agency’s January 2025 economic forecast.
CBO estimated then that inflation would be 2.2% this year and 2.1% in 2026.
The tariffs also would reduce “average real income relative to its level in the agency’s January 2025 baseline by decreasing aggregate output and raising prices for households in all income groups.”
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