University of Michigan economists anticipate bigger federal budget deficits in the coming years after Donald Trump returns to the White House with Republicans in full control of Congress, but they don't foresee any economic catastrophe on the near-term horizon.
U-M on Thursday released its annual economic forecasts for the U.S. and Michigan at the university's 72nd annual Economic Outlook Conference. The forecasts take account of ordinary expected developments, such as more Federal Reserve interest rate hikes, as well as some dramatic policy changes that might occur under the next Trump administration, such as much higher tariffs on Chinese goods and ending — or at least reducing — taxes on tips, overtime and Social Security benefits.
Overall, the forecasters see the momentum from tax cuts as canceling out some of the potential drag on the economy from Trump's threatened tariffs, at least through 2026. The U.S. gross domestic product, or GDP, would rise 2.1% year-over-year in 2025 and 2.2% in 2026 — compared with 2.9% in 2023 and its expected 2.8% rise for all of this year.
But by extending set-to-expire provisions in the 2017 Tax Cuts and Jobs Act, and then adding new tax cuts in the form of a relaxed cap on state and local tax deductions (SALT), a lowering of the corporate tax on domestic manufacturers to 15% from 21%, plus some of Trump's tax exemptions on tips, overtime pay and Social Security, it would widen the U.S. budget deficit, according to the U-M forecast.
(The economists doubt that a full tax exemption for tips, overtime and Social Security benefits would be possible.)
The federal deficit could wind up at 6.8% of GDP by the end of 2026, which would be unprecedented for the U.S. outside of wars, severe recession or the recent COVID-19 pandemic. The deficit is currently about 6.1% of GDP.
"To briefly summarize our assumptions about the first two years of the second Trump Administration," the U-M economists wrote, "we expect moderately wider fiscal deficits due to lower tax revenues that stimulate the economy, while higher tariffs undo some of the stimulus.
"This relatively benign outlook means that we do not anticipate large shifts in long-run neutral policy rate. As a result, we continue to project long-term Treasury yields to moderate."
'DOGE' cuts not counted
The forecast doesn't attempt to calculate the potential impact of one of Trump's more unconventional policy ideas, the Department of Government Efficiency, or DOGE, which would be headed by prominent businessmen Elon Musk and Vivek Ramaswamy.