Ratings agency S&P Global had some good news and bad news on the U.S. deficit outlook. The good news is that it won’t get much worse. The bad news is that it won’t get much better, either.
A key factor for the deficit forecast is President Donald Trump’s tariffs, which should help offset the impact of tax cuts and spending in the federal budget.
S&P reaffirmed its AA+ rating on U.S. debt last week, citing the overall strength of the economy, institutions that provide effective checks and balances, proactive monetary policy, and the dollar’s status as the world’s top reserve currency.
The outlook on the credit rating, which is a notch below the top AAA grade, remains stable because the deficit won’t muddy the picture.
“This incorporates our view that changes underway in domestic and international policies won’t weigh on the resilience and diversity of the U.S. economy,” S&P said in a statement. “And, in turn, broad revenue buoyancy, including robust tariff income, will offset any fiscal slippage from tax cuts and spending increases.”
Trump’s One Big Beautiful Bill Act is expected to add trillions of dollars to the deficit over the next decade as new tax cuts were added while spending saw cuts to some programs and hikes to others. At the same time, the Congressional Budget Office sees tariffs shaving trillions of dollars off the deficit.
S&P actually see some improvement in the deficit, which is expected to shrink to 6% of GDP from 2025 to 2028, down from 7.5% in 2024 and an average of 9.8% from 2020 to 2023. But that will not stop the total debt from soaring past record highs last seen during World War II.
Meanwhile, S&P sees GDP growth accelerating to an average pace of 2% in 2027 and 2028, from 1.7% in 2025 and 1.6% in 2026.
“The combined implementation and execution of the One Big Beautiful Bill Act, higher tariff revenue gains, and their effect on growth and investment will inform whether the fiscal trajectory improves or worsens,” S&P added.
So a lot is riding on tariffs. And given Washington’s reluctance to raise revenue via income tax hikes, analysts have pointed out an estimated $300-400 billion a year in tariff revenue would be too much to turn away, meaning levies are likely here to stay.
But so-called reciprocal tariffs are facing legal challenges that dispute their legal justification under the International Emergency Economic Powers Act (IEEPA).
A decision from a federal appeals court is expected by the end of September, but could come as soon as late August. And a letter from Justice Department officials with doomsday warnings about what would happen if tariffs are struck down suggested to some on Wall Street that the administration fears a court loss.
“In such a scenario, people would be forced from their homes, millions of jobs would be eliminated, hardworking Americans would lose their savings, and even Social Security and Medicare could be threatened,” the officials wrote. “In short, the economic consequences would be ruinous, instead of unprecedented success.”
Considering how important tariff revenue is to the U.S. credit rating, what would happen if the reciprocal duties are struck down? Would the U.S. be downgraded? S&P didn’t respond to a request for comment.
Meanwhile, not everyone is as sanguine about tariffs as S&P and the CBO are. Fitch ratings also reaffirmed its AA+ U.S. credit rating last week—but sees deficits worsening despite the tariff revenue windfall.
The deficit should shrink this year to 6.9% of GDP from 7.7% in 2024, as the resilient economy, solid stock market, and a tariff revenues send federal receipts higher. But when new tax cuts take hold next year, the situation will actually become worse than in 2024, as overall revenue drops. Fitch sees deficits spiking to 7.8% of GDP in 2026 and 7.9% in 2027.
“Government revenues will fall, driven by additional tax exemptions on tips and overtime, expanded deductions for state and local taxes (SALT), and additional deductions for people over 65 included in the OBBBA, despite the continued increases in tariff revenues, which Fitch expects to average USD300 billion in both years,” the ratings agency said in a statement.
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