"Massive military spending + major cuts"! Trump's 2027 budget proposal is imminent, and the risk of U.S. deficit is rising again.

The Trump administration will release its FY 2027 budget proposal this Friday, with a core focus on significantly expanding defense spending, funded in part by cuts to domestic agencies and health care coverage spending. This budget will become the first complete financial blueprint of Trump’s second-term policy vision and will set the tone for the Republican Party’s midterm elections in November.

According to reports, the budget proposal would raise defense spending from less than $1 trillion in the current fiscal year to $1.5 trillion, while also updating the decade-long deficit forecast—currently estimated at about $1.6 trillion. At the same time, the government also plans to send a “tariff dividend” of $2,000 per person to taxpayers, but that proposal has already met resistance within Congress. U.S. Treasury bond investors will closely watch whether the economic assumptions underpinning the budget are overly optimistic, and whether the associated spending cuts can clear the Senate’s procedural hurdles against Democratic obstruction. Any new doubts about the sustainability of U.S. public debt could push long-term Treasury yields higher.

This budget faces multiple political risks. The Iran war has driven up oil prices, inflation expectations have warmed, and the Federal Reserve’s room to cut rates has narrowed; the Democratic Party has made “cost of living” a central issue to win back Congress and will use this budget to amplify the political cost for Republicans of cutting health care and social safety net programs. Meanwhile, Trump is also facing pushback within his own party—last year, Congress rejected a similar domestic cutting package by bipartisan majorities.

Deficit and debt: optimistic assumptions face real-world tests

The FY 2027 budget will be the first time in Trump’s second term that the policy agenda is integrated into a single document with specific numbers. The budget proposal released last year lacked the economic assumptions needed for line-by-line spending targets and long-term cost calculations; this budget will fill that gap.

The White House’s forecast released in September last year showed that Trump’s tax and spending policies would cut the projected deficit by half over the next decade. But the tariff revenue underpinning that forecast has been sharply reduced due to a Supreme Court ruling, and it is also built on low-interest-rate and high-growth assumptions that many economists currently consider difficult to achieve.

A March Bloomberg survey of economists shows that this year’s Personal Consumption Expenditures Price Index (PCE)—the Federal Reserve’s preferred inflation gauge— is expected to rise an average of 3.1%, higher than the 2.6% projected in the February survey before the outbreak of the war; the GDP growth forecast was also cut from 2.5% to 2.3%.

The Congressional Budget Office (CBO) forecasts FY 2026 GDP growth at 2.2%. The White House’s economic forecasts have historically been more optimistic, and Treasury buyers will focus on how the government is judging the key indicators above.

Defense spending: doubts remain about the $1.5 trillion target details

Trump says he will seek to raise the defense budget to $1.5 trillion, but the specific uses of this large incremental amount are still unclear.

It is not yet clear whether the number refers only to Pentagon operations funding, or whether it includes other defense-related projects such as military construction and nuclear weapons spending by the Department of Energy. The government has also not said whether the increased spending would continue through 2028 and beyond.

Last year’s budget added $113 billion in defense spending above a bipartisan benchmark line of $84.8 billion through a legislative mechanism known as the “reconciliation process,” making it a one-time increase. What the current administration is seeking is a larger-scale boost to the benchmark line.

In addition, there are still unresolved issues in the current fiscal year. The Pentagon has submitted an emergency spending request of $200 billion to the White House to pay for costs related to the Iran war. The White House Office of Budget is evaluating the proposal, and Trump has not yet formally submitted it to Congress.

Tariff dividend: political appeal and resistance inside Congress

After the Supreme Court ruled that some of Trump’s tariff measures were unconstitutional, the government must refund the roughly $150 billion in tariffs it has already collected, giving importers a priority right to repayment.

Trump has also proposed issuing a one-time “tariff dividend” of $2,000 to individual taxpayers, which has some public appeal in an election year.

However, the proposal faces clear resistance within Congress. Even with the help of the budget reconciliation process, it would still require near-unanimous support from House Republicans—yet Republicans currently control the House only by a narrow margin of 217 to 214.

Jodey Arrington, chair of the House Budget Committee, made clear last year that he favors using tariff revenue to reduce the deficit rather than sending checks; Senate Majority Leader John Thune is also skeptical.

DOGE layoffs: the difficulty of locking them into law rises

When Trump returned to the White House last year, he brought ambitions to substantially shrink the size of the federal government. With help from the Department of Government Efficiency (DOGE), led by Tesla CEO Elon Musk, the number of federal civilian employees was cut by more than 12% compared with the final month of the Biden administration.

But so far, Congress has largely refused to pass legislation to make the layoffs permanent. While approving the rescission of funding for the U.S. Agency for International Development, Congress also rejected, by bipartisan majorities, proposals to cut domestic health care and social safety net programs.

Election-year politics further increases the difficulty of carrying out deep cuts to staffing. As the regular appropriations process stalls, Congress is increasingly relying on year-end temporary appropriations bills to maintain existing spending levels and avoid a government shutdown. At present, funding authorizations for most government agencies run through September 30; forcing through major cuts could trigger a government shutdown crisis one month before the midterm elections.

Republicans still have a fallback option: invoking a reconciliation process identical to the one used in the 2025 tax law to push through a long-term funding package for the Department of Homeland Security—which is currently experiencing the longest partial shutdown in its history—and the offsetting cuts proposed by Trump, thereby bypassing the Senate Democrats’ obstruction process.

But this route also requires a high level of agreement among some Republicans within the House who are divided on the issue.

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