The fiscal handbook: The one big beautiful bill endgame

Summary

• Congress appears poised to enact the Republican-led budget reconciliation bill commonly known as the One Big Beautiful Bill Act (OBBBA). The Senate passed OBBBA today, and our working assumption is that the House of Representatives will pass the Senate version in the coming days, sending it to President Trump's desk for his signature.

• The Congressional Budget Office (CBO) projects that OBBBA will increase the federal budget deficit relative to current policy by roughly 0.8% of GDP in fiscal year (FY) 2026 and 0.4% of GDP in FY 2027. However, increased tax revenues from tariffs should offset much of this cost, keeping the federal budget deficit near its current value of 6.5% of GDP over the next few years.

• In our view, neither a fiscal blowout nor a return to smaller budget deficits is the most likely outcome in light of the new administration's consolidated efforts from OBBBA, tariffs and DOGE. The best characterization of the near-term fiscal outlook is status quo, in our opinion.

• We estimate that the reconciliation bill will add 30-50 bps to real GDP growth in 2026, with a somewhat smaller boost in 2027. OBBBA is one reason we expect real GDP to accelerate in 2026 on the heels of a sluggish growth environment in 2025.

• Over the medium to longer run, the fiscal and economic impact is more ambiguous. In the out years, OBBBA flips from fiscal expansion to fiscal contraction as the temporary tax cuts expire and as the planned spending cuts ramp up. If this fiscal tightening occurs as scheduled, then the bill's fiscal cost over the longer run is reined in considerably.

• That said, given the recent track record of extending expiring tax cuts and punting on planned spending cuts, we think the market will assign at least some probability that much of the future fiscal tightening does not go into effect, pushing baseline budget deficits up to 8%-9% of GDP in a decade's time.

• In a report published last week, we modeled the long-run outlook for the budget deficit and national debt under varying economic outcomes, and we would encourage readers to check that out for further reading on the 10-year fiscal outlook. In short, it would take a very meaningful acceleration in real GDP to "solve" the long-run fiscal outlook.

• OBBBA also includes a $5 trillion increase in the debt ceiling. If realized, this should be enough borrowing headroom under the debt limit to ensure that the debt ceiling is not an issue until after the 2026 midterm elections. Assuming the reconciliation bill passes in the coming weeks, the U.S. Treasury will get to work quickly to rebuild its diminished cash balance.

• Our rough, initial estimate is that net T-bill issuance will total approximately $700 billion in the second half of the year, and the Treasury General Account will return to $850 billion by the end of the third quarter. We will take a deeper dive into the Treasury supply outlook in a few weeks as part of our regular Treasury refunding preview publication.

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