US tariffs and debt ceiling loom as political landscape shifts

Data released by the US Treasury indicates a federal budget deficit of nearly $2 trillion for fiscal year 2026, the highest in five years. Simultaneously, tariffs generated $310 billion in revenue last year, representing approximately 1% of the nation’s gross domestic product (GDP). This revenue stream, while insufficient to offset the deficit, is proving difficult for the government to forgo.

Executive and legislative powers further complicate tariff adjustments. Congress has previously granted substantial trade policy authority to the president, meaning Democrats cannot unilaterally eliminate tariffs even with their new congressional majority. Any legislation attempting to revoke tariffs could be vetoed by the president. Experts anticipate minimal tariff revisions before the next presidential inauguration in 2029.

Steve Okun, Founder and CEO of APAC Advisors, stated, “Trump still has tariffs. The America First trade policy isn’t going anywhere. It may be on the margins; you may get an exemption here and there. But tariffs are here to stay.”

The disagreement regarding tariffs appears to be less about the concept itself and more focused on the broad scope of the Trump administration’s previous tariff increases. Potential for negotiation exists regarding tariffs imposed on traditional US allies like the European Union, Canada, and Mexico, while tariffs targeting Southeast Asian countries and India are expected to remain in place.

Beyond tariffs, partisan divisions are expected to intensify around the debt ceiling. Projections suggest the US Treasury will reach its $41.1 trillion statutory debt limit as early as February of next year. While extraordinary measures could provide a buffer of $300 to $350 billion, postponing the “X date” to between August and November, a failure to raise or suspend the debt limit could trigger selling pressure on US Treasury securities. A failure to reach an agreement after the X date could lead to a selective default or a government shutdown.

Barry Knapp, Managing Partner of Ironsides Macroeconomics, LLC, commented, “They’re going to have to cut a deal. It probably will result in more spending, and then you know we’ve got a real supply problem in the treasury market again. More spending from a you know divided government would be a big problem, and that’s that’s one of the big looming issues for 2027.”