CBO Projections and Debt Panic: Misleading Math or Policy Precision?
- The ValueCritic
- Jun 5, 2025
- 5 min read
For the past 25 years, the CBO (Congressional Budget Office) has consistently underestimated deficits, projecting optimistic baselines that rarely align with reality. Now, in 2025, the same office warns that the House passed Big Beautiful Bill will raise the deficit by $2.4T over 10 years. But here’s the catch much of that figure stems from phantom assumptions, methodological quirks, and policy baselines that don’t reflect what markets or voters expect. So, is this really a fiscal bombshell or just another example of Washington scoring fiction?
The CBO scores the expiration of the 2017 Trump tax cuts (TCJA) as if they will fully lapse in 2025, automatically restoring $3.4 to $4.6T in projected revenue over the following decade. This assumption, technically accurate under current law, treats a politically unlikely outcome as a baseline certainty.
However, bipartisan consensus suggests that large parts of TCJA, particularly middle-class provisions, will be extended. Therefore, when the Big Beautiful Bill (BBB) proposes to make these tax cuts permanent, the CBO registers it as a new deficit increasing policy, rather than the continuation of what most voters and lawmakers expect.
This scoring method artificially inflates the deficit impact. Essentially, the model projects a fiscal windfall from a hypothetical tax hike that both parties are politically unwilling to enact and then scores any avoidance of that hike as a loss. In essence, the model creates imaginary revenue gains, then scores their cancellation as a deficit increase.
To illustrate this more clearly, from CBO’s own analysis details the effects of extending various TCJA provisions and shows a cumulative increase in the primary deficit of over $3.2T, plus $467B in added interest expense.
For their part, the CRFB (Committee for Responsible Federal Budget) used conservative growth multipliers (0.6–0.9x) and assume high interest expense elasticities (0.7–1.0x). These elasticities mean they expect only 60 to 90 cents of GDP growth for every $1 in tax cuts and 70 to 100 cents in extra debt servicing cost for every $1 in added deficit.
But academic & investment banking consensus places these figures closer to:
1.2x for revenue feedback
0.3–0.5x for interest cost sensitivity
The difference is critical. With a higher multiplier on GDP growth, more of the revenue "lost" from tax cuts is dynamically recovered via higher taxable income. And with lower interest elasticity, rising debt doesn’t translate to a proportionate rise in debt service costs.
When adjusted to these more historically grounded assumptions, the estimated deficit impact falls to just $1.8T.
Moreover, the CBO assumes real GDP growth at 1.9% annually, below the post-1990s trend of 2.4% and significantly lower than the 3.0% long-term rate projected by the Trump economic team. This growth pessimism inflates projected debt-to-GDP ratios and amplifies the interest burden artificially. In short, growth pessimism + interest cost exaggeration = inflated fiscal alarm
Added to this, Trump’s proposed tariff structure, 8 to11% effective rates across Chinese and ROW imports, is not codified, so CBO scores it as $0 revenue (due to legislative limits). But in practice, tariff receipts have been climbing. Recent retail and manufacturing data show firms are passing through higher import costs to consumers, raising both price levels and taxable sales volumes.
This pass-through not only generates tariff income at the port but also increases nominal taxable revenue downstream, on sales taxes, corporate income, and even payroll taxes when businesses adjust wages and margins to cope with inflationary pressure. These effects compound over time. Even a conservative estimate of $250B per yr in tariff revenue, roughly 1% of GDP, would produce $2.5T in receipts over a decade. That alone would offset more than the full cost of TCJA extensions. It also functions as a fiscal tool that discourages offshoring, strengthens industrial reshoring, and redistributes revenue away from foreign producers. In reality, CBO’s $0 revenue assumption reflects legislative uncertainty not economic irrelevance. The market already treats tariffs as sticky policy, and most global corporates have internalized pass-through and hedging mechanisms. Ignoring these dynamics results in a major understatement of both government revenue potential and inflation adjusted policy feedback.
Depending on whether you use CRFB's pessimism, CBO's baseline, or a more neutral model, the 10 yr deficit impact of the bill ranges from:
$5.2T (Barclays/CRFB)
$2.4T (CBO)
$1.8T (adjusted dynamic + tariff revenue model)
These numbers matter, but only when considered against the backdrop of a $35T economy projected to grow at 5 to 6% nominal per yr (AI productivity boost) . That scale of expansion generates between $1.75T and $2.1T in new GDP annually.
Even if only a fraction of that is taxed or recycled into Treasury demand, it dwarfs the relative fiscal drag posed by these deficit scenarios. In fact, the debt/GDP ratio could remain stable or even fall if nominal growth consistently outpaces interest rates and deficit expansion. The debt burden is not just a function of how much is borrowed, but of how productive and inflation resilient the economic base becomes. Current average IR on outstanding treasury securities is well below the expect nGDP projections and remain so as long as inflation expectations remain anchored.
Moreover, the highest estimate, the $5.2T scenario, is predicated on assumptions that ignore dynamic effects, presume zero tariff revenue, and overstate the sensitivity of interest costs. The CBO’s $2.4T baseline, while conservative, is methodologically more sound. The $1.8T scenario reflects the most realistic blend of macro conditions, growth elasticity, and partial policy feedback. Relative to the COVID-era $7 to 9T borrowing spree (2020–2022), all three outcomes represent a moderation, not an escalation, in fiscal pressure.
And despite deficit headlines, the 10 yr UST yield has fallen from 4.5% to 4.36% this week. Traders are betting on continued demand for Treasuries, anchored inflation expectations, and a fiscal path that even if headline scary remains within a globally absorbable range.
This decline reflects multiple factors:
Persistent demand from domestic pensions and insurance portfolios seeking duration
Ongoing foreign central bank purchases, especially amid global disinflation
A soft landing narrative that supports stable real rates
The absence of inflation breakout signs despite elevated deficits
In effect, markets are signaling confidence in the system’s ability to digest higher issuance without losing macroeconomic discipline. If inflation expectations stay anchored and the Fed maintains credibility, long-term yields will reflect real growth expectations and liquidity preferences not alarmist deficit projections.
The CBO doesn’t run bad numbers it runs static ones. That works well for some baselines. But when policy is fluid, especially following & preceding an election year, those assumptions become political instruments. We should demand better projections, not scarier ones. The economy isn’t collapsing. And if Congress chooses to rebalance taxes, tariffs, and entitlements more creatively, the debt math changes fast. Until then, debt panic is just that: a mood, not a model.