US Treasury Budget FY 2025–2026: Deficit Improvement Driven Primarily by Tariffs

Deficit Comparison: FY 25–26 vs. FY 24–25

October 2025 – January 2026 Deficit: $697 Billion

October 2024 – January 2025 Deficit: $839 Billion

The federal deficit improved by $142 billion, representing a
16.92% reduction compared with the same period of the previous fiscal year.

Where Did the Improvement Come From?

The key driver of this improvement was not structural spending reform, but
the sharp increase in customs and excise tax receipts.

Out of the $142 billion total improvement:

• $127 billion came from increased customs duties
• This represents 89.4% of the total deficit improvement

In practical terms, almost the entire fiscal improvement is directly linked
to higher tariff revenue.

Limited Industrial Impact So Far

At this stage, the increase in tariffs has primarily strengthened the Treasury’s
cash position rather than generating a visible acceleration in domestic
industrial production.

The expected reshoring or large-scale industrial revival has not yet materially
reflected in the data. Meanwhile, uncertainties remain regarding:

• The potential impact on PPI (Producer Price Index)
• The transmission into CPI (Consumer Price Index) in coming months

Inflationary effects may still emerge with a time lag, especially if import
substitution remains incomplete and domestic producers gain pricing power.

Two Strategic Considerations

1. The Nature of the Deficit Improvement

The improvement in the deficit is heavily influenced by tariff-related revenue
and cannot be interpreted as evidence of improved spending qualification or
structural fiscal discipline.

Without the increase in customs duties, the fiscal picture would look
significantly different.

2. The Institutional Dimension

The continuity of this improved fiscal position depends largely on the
confirmation of the tariff framework by the U.S. Supreme Court.

At present, the Treasury does not have the flexibility to return even one
dollar of additional customs revenue without either:

• Reducing spending elsewhere, or
• Increasing the deficit again through additional debt issuance

Resorting to new debt issuance to offset returned tariff revenues would
neutralize the improvement and reintroduce structural pressure on federal finances.

Conclusion

The FY 2025–2026 deficit reduction to date is real, measurable, and significant.
However, it is overwhelmingly driven by tariff income rather than
expenditure reform or broad-based economic acceleration.

The coming months will be critical in assessing:

• Whether tariff revenues remain stable
• Whether industrial production meaningfully responds
• How PPI and CPI evolve under the new trade structure
• How institutional decisions shape fiscal continuity

For now, the budget improvement reflects revenue mechanics more than
structural transformation — and the sustainability of this path depends
on both economic transmission effects and legal confirmation.