The Big Beautiful Bill and the Deficit: What Economists Say

Overview: 

This article examines the potential effects of the Big Beautiful Bill Act (BBB Act) on the federal budget deficit. The BBB Act, if not managed carefully, could lead to an increase in the deficit, potentially posing a threat to our economy. It's important to be aware of these potential risks.

It's important to note that the BBB Act is a comprehensive and contentious package with far-reaching implications for Americans across income groups. It touches on many aspects of the economy, either directly or indirectly. This article, however, focuses specifically on the federal budget deficit, debt implications, and their potential consequences. 

What is the Big Beautiful Bill Act? 

The BBB Act is a U.S. statute signed into law on July 4th, 2025. The stated aim of this bill is to extend and expand major tax-relief provisions first introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, with the goals of supporting employment, investment, and economic growth. Principal elements include keeping most post-2017 personal income-tax cuts and the larger standard deduction in place, rather than letting them expire. Some of these stipulations are most impactful for corporations, as the Act allows firms to immediately deduct their domestic Research & Development (R&D) costs instead of spreading them over years. It will also update selected credits and deductions that directly affect small and mid-sized firms. Specific household categories are also targeted by the Act, such as tips, families, and seniors.

What do Economists Predict?

The Congressional Budget Office and the Joint Committee on Taxation estimate that the law will add approximately $3.4 trillion to cumulative deficits over the 2025-2034 period. The BBB Act can set off a sequence of effects that may result in larger projected deficits (annual), higher debt (cumulative), and higher net interest costs (the government's cost of borrowing) in the next decade—a 10-year window is standard for estimations. The statute lowers taxes for many households and firms, resulting in increased take-home income; however, this may also lead to a direct decrease in federal revenues. This is important because federal outlays, or expenditures, are about 23.3% of the U.S. GDP (roughly $7.0 trillion in FY2025). When revenues fall while spending plans are unchanged, the gap is financed with expensive borrowing. The current federal deficit is about 6% of the GDP, which means the U.S. borrows about six cents for every dollar of national income. Without offsetting factors, this bill may further exacerbate the fiscal imbalance. 

We assume that the government will continue to fund essential goods and services, some of which include national defense, infrastructure, health care, Social Security, and income security programs. So if those spending commitments persist, a decrease in collected revenues means the government must borrow more to cover those expenses. That extra borrowing increases the government's net interest bill (the cost of borrowing). As debt accumulates, interest costs compound over time, making it more costly to service the outstanding obligations. Moreover, in the face of economic downturns, expansionary policies aimed at improving the economy will be complicated to enact due to an already severely constrained budget deficit and elevated interest costs. Government stimulus is one of the most effective ways to mitigate an economic downturn, through measures such as stimulus packages, unemployment insurance, and infrastructure projects, among other measures. However, starting from a larger baseline deficit leaves less fiscal room to effectively stimulate the economy, which, in turn, makes it challenging to recover from a recession. 

Imagine a recession semester. Your work hours get cut, but rent, groceries, and campus fees do not wait for you to secure your financial situation. A larger federal deficit forces the Treasury to issue more bonds to cover the gap between spending and revenue, which keeps long-term yields (return on bonds) and the Fed's policy rates elevated. This elevated rate leads to more expensive borrowing for businesses, landlords, and colleges. Those higher financing costs show up in students’ lives through price increases in goods and services such as textbooks, groceries, utilities, and rent. Moreover, these high rates may lead to higher APRs, which, in turn, cause more expensive private student loans, auto loans, and credit card fees. This result is relevant because the National Association of Student Financial Aid Admissions reports that U.S. adults who either never enrolled in a postsecondary education program or did not complete their degree cited the cost of college as the biggest barrier. 

It is a well-known endeavor that universities finance large capital expenditures, such as research labs, student housing, academic buildings, and various other amenities, by issuing and financing bonds. However, what happens if, as a consequence of the BBB Act and its potentially rising interest rates, a university must tighten its budget? There will be a direct hit on the students. Not only will borrowing costs for students increase, but tuition costs and facility fees will rise; along with fewer course sections due to the universities' budgetary constraints in hiring faculty. This not only affects students, but it may also affect the broader economy. With all of these institutional expenses and costly borrowing, it is likely that fewer students will pursue higher education. Affordable costs in pursuing higher education is necessary to develop a surplus of skilled workers ready to enter the workforce. Significant disparities exist in university attendance between low-income families and their wealthy counterparts. For example, a 2022 study cites that 79% of 18-to-24-year-olds from the highest family income quartile enrolled in postsecondary education, compared to only 44% from the lowest income quartile. Additionally, a 2023 study cites that 89% of students from well-off families enrolled in college, compared to 51% of those from low-income families. Given the potential implications of the BBB Act on the federal deficit and borrowing costs, the potential worsening of wealth distribution can exacerbate these disparities.

On the other hand, some economists and politicians argue that the bill presents plausible pathways for improving the deficit-to-GDP ratio. For example, lower tax rates have the power to increase the labor supply (the number of workers and hours), investment, and productivity of households and firms, which broadens the tax base—meaning there will be more income to tax that can offset the revenue losses. This perspective is linked to the Laffer Curve, which presents the relationship between tax rates and government revenue. The curve suggests that there is a theoretical optimal tax rate that maximizes collected revenue based on both an arithmetic and a multiplier effect. The arithmetic logic holds that every dollar in tax cuts reduces government revenue by one dollar and, therefore, decreases the stimulative effect of government spending by the same amount. The logic of the multiplier effect holds that the tax cut can increase the take-home income and change consumer behavior (more work, more investment, thereby increasing the realization of capital gains). Increased spending is often connected to an increase in consumer demand (the desire to purchase goods and services), which, in turn, will create more business activity that increases production and firms' demand for labor, resulting in improved employment and economic growth. However, disagreement often arises in determining this optimal point and the official dynamic in offsetting revenue losses.

It is essential to note that the latter perspective is highly controversial and is considered "wishful thinking" by some. The Laffer Curve, like many other graphical representations, has limitations. However, three are undeniably clear; there is an oversimplification of the tax system (often modeling a single tax rate), the curve implicitly assumes an increase in taxes will result in fewer hours worked or income avoidance, and the ideal tax rate is empirically uncertain.   

Conclusion:

Most current research supports the former perspective, that the BBB Act will increase deficits over the next decade, and that potential offsets in revenue losses may be partially, but not entirely, eliminated. However, economists are merely attempting to predict the future, meaning neither perspective can be recognized as entirely accurate at this time. Understanding both perspectives is beneficial for comprehending the potential economic effects of the Big Beautiful Bill Act. As undergraduate students, and more importantly, as American citizens, it is essential to stay informed about current economic trends. Domestic and international affairs affect us all, and recognizing particular policies, bills, and legislation that impact our day-to-day lives is vital to a strong nation.