Have US Public Finances Really Improved, or Is It Just a Mirage?

Now that Canada’s provincial and federal governments have released their budget updates and revised their projections for the next few years, let’s take a look at the finances of our neighbour to the south after the turmoil of 2025. A more detailed version of this article with additional information on the Trump administration’s recent budget plan will be published soon in an upcoming Economic Viewpoint.

The Current State of Affairs

The US federal government ended its fiscal year in September 2025 with a deficit of US$1,775B, less than the US$1,817B deficit recorded in fiscal 2024. But a more up-to-date picture can be drawn using monthly data from the US Treasury. The 12‑month rolling federal deficit fell to US$1,637B in March of this year. That means public finances continued to improve in the first half of the current fiscal year, which ends this September (graph 1).

When compared to January 2025, the very beginning of President Trump’s second term, the numbers look even better. Back then, the 12‑month deficit was US$2,125B. So between January 2025 and March 2026, the deficit shrank by nearly 23%, which is nothing to scoff at. That said, most of that US$488B improvement in the deficit came from higher revenues (+US$527B), while spending went up by US$40B. It’s also important to remember the rather unique circumstances affecting the US public sector in 2025: a government shutdown of record-breaking length that held back federal spending last fall, the budget cuts by Elon Musk’s DOGE and an administration determined to scale down departments like health and education.

Spending on major mandatory social programs has climbed by 7.4% since January 2025, while spending on debt servicing and defence have risen by 7.5% and 3.5% respectively. But non-military discretionary spending fell 17.0%, a US$304B decrease from the start of President Trump’s second term. The new administration had a particularly strong impact on certain departments, including environmental protection (-51.4%), international aid (-58.5%) and education (-90.6%). The federal public service has obviously been affected by all this. Monthly data from the Bureau of Labor Statistics showed that in March, the federal government employed 2,059,400 civil servants (excluding the postal service). That’s down by 346,300 (-14.4%) from January 2025.

The increase in the federal government’s revenues came mainly from personal income taxes, which went up by 13.2%. In contrast, corporate income tax revenues went down by 14.1% since January 2025. The decline started in September 2025, when businesses began implementing the tax cuts passed last summer. Higher tariffs also boosted government revenues, especially after April 2025, sending an additional US$243B to federal coffers compared to January 2025.

The Impact of Key Republican Policies

Our assessment of US public finances since January 2025 shows that tariffs have helped improve the federal government’s financial position. Revenues from President Trump’s protectionist policies peaked in October 2025, when monthly inflows reached US$33.1B. They have since declined, in part because some tariffs were walked back (especially on food starting in November) and trade patterns shifted. In addition, the Supreme Court upended the whole situation when it struck down the reciprocal, fentanyl and border security tariffs. In March, tariff revenues amounted to only US$24.0B, the lowest since May 2025. And the government will have to refund the tariffs that were ruled illegal. A document External link. submitted to the United States Court of International Trade claimed that as of March 4, 2026, nearly 330,000 US importers had paid around US$166B in duties before the tariffs were overturned by the Supreme Court. This money will eventually have to be paid back, and a process for claiming these refunds was recently put into place. This means that some of the improvement in the federal budget was illusory and will be reversed.

The other flagship policy affecting US public finances was the One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025. We commented External link. on the OBBBA shortly before it was given final approval by Congress. Its impact could already be seen in fiscal 2025, as corporate income tax revenues plummeted. The Congressional Budget Office (CBO) estimated that the OBBBA reduced corporate tax inflows by US$100B in 2025, which will be followed by annual declines of US$152B in both fiscal 2026 and fiscal 2027. The estimated impact of personal income tax cuts was relatively modest in 2025 (US$32B), but will increase substantially in 2026 (US$326B) and subsequent years.

The Latest CBO Projections

In February, the CBO published its most recent federal budget outlook. Based on the legislation in effect at that time, including the OBBBA, the CBO’s forecast showed the deficit worsening slightly over the next several years. It would grow from US$1,775B at the end of fiscal 2025 to US$1,853B in September 2026 and then US$1,887B in 2027 (graph 2). As a percentage of GDP, that’s actually fairly stable, amounting to 5.8% in 2025, 5.8% in 2026 and 5.7% in 2027. Debt held by the public would rise from 99.4% of GDP in 2025 to 100.6% in 2026, and climb all the way to 120.2% in 2036.

The Cost of War

The current conflict in the Middle East could also change the outlook over the very short term. The Department of Defense notified members of Congress this week that the war with Iran has so far cost approximately US$25B. Most of this was apparently spent on munitions, but some also went to operations, maintenance and equipment replacement. Additional costs may follow, and it was recently reported that the White House was about to ask Congress for US$200B in immediate additional funds for the war in Iran. Other, smaller amounts have also been proposed.

The economic consequences of the war in Iran are not yet clear. Confidence has been affected by higher prices for energy, especially gasoline, but so far the negative repercussions on economic growth and the labour market have been limited. If year-over-year inflation were to rise by 0.50 percentage points, with nominal interest rates increasing by an equivalent amount, the annual deficit would swell by approximately US$30B. And if economic growth were to slow by 0.30 percentage points, the deficit would expand by around US$15B. Our baseline scenario does not anticipate a sharp decline in real GDP growth or runaway inflation. But a prolonged conflict would heighten the risk of economic conditions that would adversely affect public finances, along with the probability that Congress or the White House would introduce new measures to support households or businesses.

In the End, Public Finances Have Improved, but Not by Much

Public finances improved slightly from fiscal 2024 to fiscal 2025 and in the first six months of fiscal 2026. That said, once we consider the various efforts to cut costs, the extended government shutdown and the revenues from tariffs, the reduction in the deficit remains relatively modest. Meanwhile, public debt is continuing to grow rapidly. In the very short term, we’ll need to consider the budgetary and economic impacts of the conflict in the Middle East, as well as any changes to the administration’s trade policy. There isn’t much room to manoeuvre in the event of a sudden and unexpected economic downturn. The recent rise in global uncertainty has renewed the appeal of the US dollar and Treasuries. But the risk that foreign investors will once again start to turn away from US assets remains.