What the 2025 US fiscal budget may preview for 2026 markets
Image Details: Stock Image of US Capitol in Washington, D.C. From Squarespace
Overview: The US Government 2025 budget deficit was one of the few times in the 21st century where the budget deficit reduced from previous years. While the government still ran a deficit of $1.775 trillion, this was a $41B reduction from 2024. In GDP terms, this reflected a deficit drop from 6.3% of GDP to 5.9% of GDP. Showcased below are some summary statistics of the 2025 US budget deficit and their relative comparison to previous years. While there are many news articles that have reported on this topic, this particular information has been sourced from CNBC Economy (https://www.cnbc.com/amp/2025/10/16/us-budget-deficit-lower-in-2025-tariffs-debt-payments-both-at-records.html , US Budget Deficit Information):
Visual Summary of the 2025 US Budget Report (Source: CNBC)
Visual Summary of the 2025 U.S. Budget Report (Source: CNBC)
Key figures from Treasury data, summarized by CNBC and formatted by MacroBytes. Clear wins on receipts and tariffs; pressure from record interest outlays.
• Despite a modest improvement, the deficit remains large in absolute terms and relative to GDP.
Source: CNBC summary of Treasury data (Oct 16, 2025). Figures align with Treasury/Reuters tallies used in prior MacroBytes posts.
The Big Picture - What These Numbers Actually Mean: The budget deficit reduced from 2024 for a few reasons. For one, US federal revenue reached all time highs of $5.2 trillion due to rising wages, leading to an overall stronger taxable base from a monetary perspective. Additionally, the recent increase in US baseline tariff rates across various trading partners have continued to increase import-related customs revenue by over 100% since 2024.
Despite a reduced budget deficit, US debt continues to climb. Realistically, a $41B reduction in a deficit of over $1.7 trillion is negligible, especially considering that US debt is expected to rise above $37 trillion, and almost over a 125% debt-to-GDP ratio. Many economists agree that a debt-to-GDP ratio of over 130% is almost a “point of no-return” - a point in which countries have rarely been able to reduce debt burden historically.
MacroBytes Visualization of US Debt-to-GDP Ratio by Decade
(Data Sourced From: https://www.longtermtrends.net/us-debt-to-gdp/, but visualized by MacroBytes)U.S. Federal Debt-to-GDP (by decade, 1870–2025)
Approximate values derived from LongTermTrends chart — for visual trend context.
Why This Matters: A rising deficit has numerous implications for all sectors of the US economy. For one, a rising debt level leads to increased interest costs for the government - in times of higher rates such as 2025, interest payments can be immensely high, reducing the governments ability to finance developments in areas such as infrastructure, R&D, education, etc. This year, the US saw record interest payments of $1.2 trillion, representing how disastrous US debt is getting.
Beyond this, a higher debt leads to increased fiscal instability, making governments less stable during crises and reducing their ability to borrow due to increased public doubt. A higher debt leads to reduced trust in debt-related assets such as government bonds, t-bills, notes, etc. This reduced trust leads to investors requiring higher interest rates to compensate the additional risk of a government default on debt, and this requirement of higher rates further cyclically leads a further increase of interest payments, as the government aims to find ways of continuing to attract investment. If interest rates aren’t increased to attract new bond investors, the Federal Reserve may try to buy back government bonds to keep interest rates low.
Regardless of the option, a raising debt-level has two outcomes, which sometimes occur simultaneously or over time. (1) Higher interest rates lead increasingly difficult interest payments paired with slow economic growth as borrowing costs increase. While this over time may lead to more foreign investment, it inevitably causes a government default in the long-run unless the debt is somehow restructured. (2) The Federal Reserve buys back bonds, lowering interest rates, and leading to currency depreciation as less foreign investors trust in American markets while simultaneously increasing the risk of disastrous inflation.
How This Impacts You: In the near-term, rising debt payments may not seem like it is impacting end consumers and everyday Americans like you and I, but the reality is, it is. Another year of a budget deficit means the following:
The government must borrow more money to pay for our $1.7 trillion deficit, indicating they will continue to try to sell bonds and keep rates relatively high (despite a few rate cuts that may occur for other reasons). This means higher mortgage payments, student loans, and any personal debt.
Your taxes are increasingly not going to your healthcare, social security, infrastructure, or education, and are increasingly being sent to China and Japan (largest holders of US debt) as a hefty $1.2 trillion interest payment.
Your groceries, utilities, and commodities cost more due to sticky inflation that won’t reduce due to domestic goods such as housing, cars, etc. remaining expensive.
Nation-wide wage growth may be stagnant due to businesses not wanting to spend/borrow as much, hire more people - creating a employer centric market.
Income inequality rises, as high earners continue to receive high interest payments in their retirement accounts, while low earners have wages that go less far and receive less $ value in terms of their retirements and investments.
Interactive Chart by MacroBytes Visualizing Impacts of Debt (Click Box to Expand)
🧭 The Real-World Impact of High U.S. Debt (2026 Outlook)
Each tile shows how the U.S. debt burden and $1.2 trillion interest payments trickle down into real life — through interest rates, prices, taxes, and inequality.
💸 Borrowing Costs Stay High Rates ↑
- 30-year mortgages remain around 6–7% instead of returning to 3–4%.
- Auto and student loan rates stay elevated as Treasury yields anchor higher.
- Credit card APRs remain above 20%, making household debt more expensive.
Even if the Fed cuts rates, heavy Treasury issuance keeps yields “sticky.”
🏗️ Less Public Investment Crowd-out
- Record $1.2T interest costs crowd out funding for infrastructure, education, and R&D.
- Federal agencies slow new projects; local grants shrink.
- Long-term growth potential weakens as fiscal room disappears.
Every extra dollar toward debt interest is one less toward national productivity.
📈 Inflation Stays Sticky Prices ↑
- Deficit spending keeps demand high; inflation stabilizes around 2.5–3%.
- Groceries, rent, and domestic goods (like housing and cars) stay expensive.
- Energy and import prices fluctuate as the dollar remains strong but volatile.
Inflation won’t surge — but it won’t fall to 2% either. “Affordable” feels redefined.
💰 Taxes Become Less Effective Efficiency ↓
- More of your tax dollars go to interest payments instead of public services.
- Deficit-funded programs shrink or become delayed.
- Bracket creep quietly raises taxes without visible policy changes.
Taxes aren’t necessarily higher — but they buy less social and economic value.
👷♀️ Slower Wage Growth Hiring ↓
- Businesses face higher borrowing costs → less expansion and fewer raises.
- Labor demand cools; unemployment edges toward 4.5–5%.
- Employers regain leverage, creating an “employer’s market.”
Paychecks grow slower, even if nominal wages rise slightly with inflation.
⚖️ Wealth Gap Widens Inequality ↑
- Wealthier Americans earn high yields on Treasuries and savings accounts.
- Lower-income households face rising costs and shrinking safety nets.
- Retirement inequality grows as compounding favors the already capital-rich.
High rates reward savers but punish debtors — widening the wealth divide.
Opinion - 2026 Outlook & Projections: The 2026 outlook for the US economy, equity markets, and technology remain volatile and uncertain. As international policy leads to higher-than-expected inflation, immigration policy causes a weaker and slow growing labor market, and Fed interest rates remain high, we expect “stagflationary” trends to increase throughout the year. Below is MacroBytes’ projections for the 2026 economy, markets, and growth.
MacroBytes Outlook & Projections (Opinion)
MacroBytes 2026–2027 Economic Projections
Baseline scenario assumes persistent fiscal deficits, elevated debt servicing costs, and moderate stagflationary pressures. Figures represent estimated year-end or annual averages.
| Indicator | 2026–2027 Projection | Outlook |
|---|---|---|
| U.S. GDP Growth | −1.0% to +1.0% | Sluggish |
| Average Inflation (All Goods) | ≈ 3.5% | Above Target |
| Unemployment Rate | ≈ 5.5% | Soft Labor Market |
| Federal Funds Rate | 3.6 – 4.1% | Moderating |
| 10-Year Treasury Yield | 4.0 – 4.5% | Elevated |
| Corporate Earnings Growth | 0 – 2% | Flat |
| Equity Market Valuations (P/E) | 15 – 17× | Normalized |
| Consumer Confidence Index | ≈ 90 (↓ from 2024) | Cautious |
| Federal Debt-to-GDP Ratio | 125 – 130% | Record High |
MacroBytes internal estimates based on current fiscal trajectory and 2025-Q4 macro conditions. No external sources used.
Sources:
US Fiscal Budget 2025: https://www.cnbc.com/amp/2025/10/16/us-budget-deficit-lower-in-2025-tariffs-debt-payments-both-at-records.html
Historic Debt-to-GDP Ratio: https://www.longtermtrends.net/us-debt-to-gdp/
* All visualizations were created by MacroBytes itself - data is sourced as needed when collected from external sources but visualized by MacroBytes
