Today we released The Budget and Economic Outlook: 2026 to 2036, along with a one-page summary of key projections.
Since the last edition of the Outlook was published in January 2025, three major developments have affected CBO's baseline budget and economic projections: the 2025 reconciliation act (Public Law 119-21), higher tariffs, and lower immigration. After I discuss some highlights from the report, I'll have more to say about how those three developments are incorporated in the baseline.
The Budget
The deficit for fiscal year 2026 is projected to be $1.9 trillion, equal to 5.8 percent of gross domestic product (GDP), which is about the same in relation to the size of the economy as the 2025 deficit. Deficits from 2026 to 2035 are projected to total $23.1 trillion, which is $1.4 trillion (or 6 percent) more than in CBO's January 2025 baseline.
By 2036, in the current baseline, the deficit reaches $3.1 trillion, or 6.7 percent of GDP. Those sustained large deficits are historically unusual, given that the unemployment rate is projected to remain below 5 percent.
Revenues are roughly stable in relation to the size of the economy, rising from 17.5 percent of GDP in 2026 to 17.8 percent in 2036. Outlays increase from 23.3 percent of GDP to 24.4 percent of GDP over the next decade as spending on Social Security, Medicare, and interest payments grows faster than output.
Federal debt held by the public grows from 99 percent of GDP at the end of 2025 to 120 percent of GDP in 2036. Under current law, in our projections, debt in 2030 surpasses the historical high of 106 percent of GDP that it reached in 1946. The balance of Social Security's Old-Age and Survivors Insurance Trust Fund is exhausted in 2032, one year earlier than we projected last January. Debt grows to 175 percent of GDP at the end of our 30-year long-term projections.
The impact of that growing debt is reflected in the deficit projections through higher interest costs. Net outlays for interest go from $1.0 trillion in 2026 to $2.1 trillion in 2036, rising from 3.3 percent of GDP to 4.6 percent.
Our budget projections continue to indicate that the fiscal trajectory is not sustainable.
Changes to CBO's Budget Projections
Changes to the budget projections are discussed in detail in Chapter 5, including the effects of the three significant developments I mentioned at the outset: the 2025 reconciliation act, higher tariffs, and lower immigration.
The 2025 reconciliation act increases CBO's projections of deficits from 2026 to 2035 by $4.7 trillion, higher tariffs reduce deficits by about $3 trillion, and lower immigration increases deficits by $0.5 trillion. Those estimates account for changes in the economy brought about by each of the three developments and related debt-service costs. Box 5-1 provides details.
We also go into detail in the Outlook regarding how the 2025 reconciliation act was incorporated in our budget projections. It increases primary deficits by $3.7 trillion from 2026 to 2035. Increased debt service adds another $0.9 trillion, and then we account for the effects on the budget from macroeconomic changes to arrive at the total deficit impact of $4.7 trillion. Tax provisions including the permanent extension of provisions of the 2017 tax act increase deficits, as does increased spending on defense and homeland security. Other provisions of the 2025 reconciliation act, such as changes to Medicaid and the Supplemental Nutrition Assistance Program (SNAP), reduce deficits.
It is important to note that the current baseline projections span a different window than the July 2025 cost estimate that we published for the bill as enacted. Moreover, unlike that cost estimate, they include the law's effects on interest costs and on the budget from macroeconomic changes.
The Economy
We project stronger real GDP growth in 2026 as the positive effects of the 2025 reconciliation act on growth outweigh the drag from higher tariffs and lower immigration. (Real GDP is nominal GDP that has been adjusted to remove the effects of changes in prices.)
Real GDP growth then slows to 1.8 percent from 2027 on, reflecting several factors that roughly offset each other. Stronger incentives to work and invest under the 2025 reconciliation act boost economic growth, while larger deficits and slower labor force growth from reduced immigration attenuate it. Our projections of economic growth incorporate a positive effect of generative artificial intelligence (AI) on productivity growth, amounting to an increase of about 10 basis points per year, on average. That faster growth from AI increases the level of output in the nonfarm business sector by 1 percent in 2036.
The 2025 reconciliation act contributes to stronger growth in 2026 that boosts revenues but also increases interest rates. The latter effect dominates, so overall, the economic changes brought about by the 2025 reconciliation act slightly increase the deficit. That result highlights how the nation's large stock of debt influences the way that changes in the economy stemming from legislation affect the federal budget.
In our economic forecast, which was finalized in early December, the Federal Reserve reduces the federal funds rate (the rate financial institutions charge each other for overnight loans) by 25 basis points in 2026. The interest rate on 10-year Treasury bonds rises gradually from 4.1 percent in the fourth quarter of 2025 to 4.3 percent in the fourth quarter of 2027. Interest rates remain relatively stable after 2027 in our forecast, as the forces exerting upward pressure on interest rates (most notably rising federal debt) and the forces exerting downward pressure on them (most prominently the slower growth of the labor force) balance each other out.
Phillip L. Swagel is CBO's Director.