Improving through 2025Q3. But taking out the revenue associated with the illegal IEEPA tariffs, well…
Figure 1: Federal budget balance excluding automatic stabilizers (blue), and excluding IEEPA tariffs (red), as a share of potential GDP. Assumes amounts above Q1 tariff revenue is IEEPA related tariff revenue. Source: CBO, Effect of Automatic Stabilizers (August 2025) and author’s calculations.
I show the ex-customs revenue associated with IEEPA tariffs (actually a guesstimate) adjusted budget balance because we know that these are in principal supposed to be fully refunded (starting in 2026Q1, which is after the sample shown, as CBO only provides projections through Q3).
CBO estimates FY2027 cyclically adjusted balance to potential GDP at -5.8%. This single statistic informs why we should expect real rates to remain elevated.
It’s unclear to me how the ongoing war, tariff refunds and challenges to the newly announced tariffs will affect the cyclically adjusted balance, as all these issues are in a state of flux.
With respect to customs revenue, one can show the uncertainty be referring to Paweł Skrzypczyński’s calculations of the revenue, net revenue and refunds:
Source: Paweł Skrzypczyński.
Illegal tariffs acted as a money pump, first from business to government, then from households to business. Ignoring the lag, that nets out to a transfer from households to government – a tax.
Tariff refunds amount to a transfer from government to business. It is entirely at the discretion of businesses whether any of that money goes back to households. This transfer amounts to a subsidy to business. We’ll probably see it in quarterly profits data.
As a policy, counting the courts’ rulings as policy, tariffs and refunds together have increased inflation, transferred money from an alreadt-burdened household sector to an apparently-thriving business sector (small business excepted), interrupted trade and factory activity, done nothing to improve the budget balance while being used as an excuse to cut taxes, thereby worsening the budget balance, hurt our relations with allies and adversaries and damaged global economic activity. That’s a hell of mess just to satisfy the vanity of one old pervert.
I’m tired now. Somebody else will have to do the tally for the war on Iran.
By the way, you can read the tariff-and-refund round trip as a microcosmic episode of the wider attack on the middle and lower classes by rich elites, as described here:
https://www.ineteconomics.org/research/research-papers/a-revolution-of-falling-expectations-the-macroeconomic-roots-of-popular-discontent
The same basic analysis has been around in various forms forever. In ancient times, debt jubilees, limiting of debt servitude and Solon’s reforms, and more recently Bismarck’s State Socialism, Marxism, FDR’s New Deal and Johnson’s Great Society all at least tacitly recognized that the interests of the rich are inimical to social stability and the general welfare. Our current kleptocratic administration is just a more blatant manifestation of a perpetual threat to the nation’s health and stability. Heck, even Krugman is coming around:
https://paulkrugman.substack.com/p/from-kakistocracy-to-cheatistocracy