Kelly Evans: Are we past peak deficits?

CNBC

08-07-2025

The fiscal hawks warn it's "irresponsible," "fails the American people," and will doom the next generation. Elon Musk just started a new political party over it. So why is the market shrugging off the president's newly signed budget bill?
As the massive, $4 trillion bill advanced through Congress over the past month, Treasury yields actually The benchmark 10-year yield went from 4.6% to 4.18% last week on the eve of its passage.
"Despite the long list of budget think tanks warning [the bill] will increase the deficit and debt, the Treasury market suggests there are no supply-related concerns," wrote Barry Knapp of Ironsides Macroeconomics. Not only did Treasury yields outright decline, but other signs of fiscal excess--yield curves, swap spreads, real rates, and the 10-year term premium--also relaxed in recent weeks.
So what gives? Let's step back for a moment, and remember that the bill's $4 trillion estimated "cost" is not a true, fixed cost like a spending package that would directly raise deficits and debt. Primarily, this bill extends the 2018 tax cuts past January 1 of next year. The estimated "cost" of doing that is foregone government , to the tune of $4.2 to $5 trillion over the next decade.
But there are offsets. For one, government spending cuts--to the tune of about a trillion dollars over the next decade. "Markets are more focused on [government] spending," Knapp wrote, "and the cuts in the mandatory programs that were the largest contributors to spending increasing from the 1981 to 2019 median of 20.3% of GDP, to the current 24% path."
Second, higher GDP growth that is expected to result from both lower income taxes and the business incentives in the package. The bill's hefty price tag is based off of roughly 1.8% annual GDP growth. If those factors result in 2.5% growth instead, the "cost" falls substantially because revenues from income, corporate, and capital gains taxes will be higher than expected. This is also what the market appears to be discounting after the stronger than expected data lately.
Now throw in some additional revenues from tariffs. The U.S. collected $24 billion in May, and is on a run-rate of roughly $200 billion a year. The Yale Budget Lab thinks tariffs could raise $2.6 trillion over the next decade--or $2.2 billion on net, after subtracting economic losses that result. That's still a huge offset to the deficit and debt projections coming from the budget bill alone.
All of which is why one Washington economist this week said that rather than , he thinks the budget deficit could actually from its current 7% to more like 4.5% to 5% as all of these policies fully take effect.
To put it differently: the market has already priced in pretty dire scenarios for our debt and deficits. At least for now, it's adjusting to the possibility of a fiscal picture that could turn out to be less catastrophic than feared.
See you at 1 p.m!
Kelly
Twitter: @KellyCNBC
Instagram: @realkellyevans