Investing.com - Steep federal government spending cuts, sizeable tariff revenues, and limited tax cuts could lead to a "meaningful" reduction in the $1.83 trillion U.S. deficit compared to the recent past, according to the analysts at Deutsche Bank (ETR:DBKGn).
But in a note to clients, the analysts argued it will be difficult for the Trump administration and Republican lawmakers to reduce the budget defict "noticeably" below current projections put forward by the Congressional Budget Office.
The U.S. federal budget gap widened in the first four months of the fiscal year to an all-time peak of $840 billion, driven up by higher spending in areas like debt-interest payments and Social Security, Treasury Department data showed earlier this week.
When adjusted for calendar deficits, the cumulative deficit for the October to January period widened by 25%, according to Bloomberg News calculations. The trend may complicate Treasury Secretary Scott Bessent's goal of reducing the gap down to 3% of gross domestic product from 6.5% in 2024.
In their "best case" scenario, the Deutsche Bank analysts said there would be $200 billion in net spending cuts in 2026 and 2027, as well as an extension to -- but no addition on top of -- Trump's 2018 tax reduction bill. The president's ongoing tariff policy would also contribute a maximum of around $200 billion per year, they estimated.
Even in this most optimistic of outcomes, they predicted that the 2026 U.S. budget deficit would be reduced by $6 billion relative to the CBO's baseline projections -- which also do not factor in the extension to the so-called Tax Cuts and Jobs Act.
Complicating matters further would be an uptick in federal expenditures outlined in a current budget plan put forward by the Republican-controlled House of Representatives, they added. In this proposal, more spending would be front-loaded over the next few years to address major Trump administration priorties like border security and defense, they said.
The House budget also calls for a capping of government contributions to Medicaid, a federal program providing health insurance to low-income families, and reforms to payments made into Medicare, a government-run health insurance program for senior citizens.
"These will also be politically contentious," the analysts said.
Meanwhile, they noted that even if the Elon Musk-led Department of Government Efficiency achieves a permanent 10% reduction in the size of the federal workforce, the savings would be roughly $25 billion a year, assuming a total hiring freeze. The federal budget currently stands at around $6.75 trillion, according to U.S. Treasury data.
"In short, realizing substantial deficit reduction beyond the CBO’s projections could well require a high degree of political will to address entitlement reform," the analysts wrote.