War spending surge combined with tariff revenue decline raises concerns about Besson's 3% deficit target facing difficulties

The outlook for U.S. fiscal health is facing dual pressures. The Supreme Court’s reversal of broad tariffs imposed during the Trump era, combined with additional expenses from the Iran conflict, make it increasingly difficult for Treasury Secretary Yellen to achieve the goal of reducing the deficit-to-GDP ratio to around 3%.

The Supreme Court’s decision removes a significant revenue source for the federal government. According to economists cited by Bloomberg, the tax revenue from future tariffs is expected to fall far short of previous levels. Meanwhile, the Iran conflict has increased government spending needs and driven up inflation through rising oil prices, further limiting the Federal Reserve’s room to cut interest rates—which would otherwise help reduce the deficit’s interest costs.

These shocks are piling up, worsening an already challenging fiscal trajectory. Nonpartisan Congressional Budget Office (CBO) forecasts last month projected that the U.S. deficit as a percentage of GDP will remain around 6% over the next decade, not yet accounting for recent developments. Against a backdrop of worsening external conditions, Yellen’s goal of bringing the deficit down to 3% by 2029 becomes even more difficult.

Dual shocks hit both revenue and expenditure sides

Tariff rulings directly impact revenue. After the Supreme Court overturned Trump-era tariffs, related tax revenues were substantially weakened, and whether alternative measures can fill the gap remains uncertain. Bloomberg reports that tariff revenues peaked last October.

Spending is also under pressure. The Pentagon has requested an additional $200 billion for Middle East conflicts. Meanwhile, soaring oil prices have heightened inflation expectations, further dampening market expectations for Fed rate cuts—which would help reduce the deficit by lowering debt interest payments.

Maya MacGuineas, president of the non-profit, non-partisan Committee for a Responsible Federal Budget, states, “Both the tariff ruling and the war are pushing an already deteriorating fiscal path further off course. The ruling will reduce federal revenue, and whether substitute tariffs can make up the difference is unclear; the war will undoubtedly bring substantial new costs.”

Yellen downplays the shocks, sticking to growth-driven strategies

Yellen has publicly taken a relatively restrained stance on these risks. In an interview with NBC on March 22, she said, “We have sufficient funds to finance this war,” citing over $1 trillion annually in military spending. In her statement accompanying the release of the government’s annual financial report, she said, “Through growth, we can gradually bring the federal deficit down to 3% of GDP,” adding that “the current administration inherited an unsustainable fiscal trajectory.”

Regarding deficit figures, Yellen has recently frequently cited last year’s reduction of the deficit rate to below 6%. However, this improvement partly results from a one-time accounting adjustment in federal student loans, artificially lowering expenditure calculations. Bloomberg reports that, according to estimates from JPMorgan and others, excluding this factor, the actual deficit rate would again exceed 6%.

Deeper structural pressures loom

While the tariff ruling and Iran conflict garner short-term attention, Jessica Riedl, a fiscal policy expert at the Brookings Institution, points out that over a longer horizon, these factors may have less impact than the underlying structural drivers of the deficit. She notes, “Given the current $1.8 trillion budget deficit, the Iran conflict has not yet caused a catastrophic fiscal blow.”

The more fundamental pressure comes from automatic growth in social welfare spending driven by an aging population. As the number of retirees continues to rise, Social Security and Medicare expenditures steadily increase. CBO’s forecast from February projects the deficit rate will rise to 6.7% by 2036, not yet factoring in the Iran war’s impact, and assuming tariffs remain unchanged—conditions that the Supreme Court ruling has already disrupted.

Michael Peterson, CEO of the Peter G. Peterson Foundation, states, “Borrowing trillions at such a rapid pace without any plan to address it is, by definition, unsustainable.”

Debt levels and interest costs continue to rise

The deterioration of U.S. fiscal health has deep roots. Large-scale pandemic relief measures, combined with subsequent inflation surges, created a “double blow”: on one hand, massive pandemic spending increased debt levels; on the other, rate hikes to curb inflation significantly raised interest costs. This dual impact, along with growing welfare expenditures driven by an aging population, makes fiscal pressures increasingly difficult to contain.

Currently, U.S. public debt is roughly equal to GDP. CBO forecasts that federal debt held by the public will reach $32 trillion this year, about $3 trillion higher than at the start of the current administration. Net interest payments are expected to surpass $1 trillion in fiscal year 2026, accounting for more than half of the overall budget deficit estimate.

While the market has not yet shown signs of refusing to buy U.S. Treasuries, benchmark 10-year yields have risen about 40 basis points since the Middle East conflict began. During a congressional hearing last year, Yellen admitted, “It’s very difficult to predict when and whether the market will push back against the supply of Treasuries.”

Jessica Riedl succinctly captures the bipartisan dilemma: “Neither party has seriously come up with a plan to stop the flood of deficits.”

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