S&P Global recently confirmed the U.S. still has a AA+ credit rating with a stable outlook, partly because of strong tariff income. This revenue helps balance out the effects of tax cuts and federal spending. While S&P doesn’t expect big improvements in the deficit, it also doesn’t see it getting much worse. However, some tariffs face legal challenges and could be overturned.
S&P Global had mixed news about the U.S. deficit. The good news: it isn’t expected to get much worse. The bad news: it won’t improve significantly either.
One major factor in the forecast is President Donald Trump’s tariffs, which help counteract the cost of tax cuts and spending increases.
S&P reaffirmed the AA+ rating on U.S. debt last week, highlighting the economy’s strength, strong government institutions, proactive monetary policy, and the U.S. dollar’s role as the world’s main reserve currency.
The credit rating outlook, just below the top AAA grade, is stable because the deficit isn’t causing serious concern.
“This incorporates our view that changes underway in domestic and international policies won’t weigh on the resilience and diversity of the U.S. economy,” S&P said. “And in turn, broad revenue buoyancy, including robust tariff income, will offset any fiscal slippage from tax cuts and spending increases.”
Trump’s One Big Beautiful Bill Act (OBBBA) is expected to add trillions of dollars to the deficit over the next decade, combining new tax cuts with spending changes. At the same time, the Congressional Budget Office projects tariffs could reduce the deficit by trillions.
S&P sees some improvement, expecting the deficit to shrink to 6% of GDP from 2025 to 2028, down from 7.5% in 2024 and an average of 9.8% from 2020 to 2023. Still, total debt is expected to reach levels not seen since World War II.
GDP growth is also expected to pick up, averaging 2% in 2027 and 2028, up from 1.7% in 2025 and 1.6% in 2026.
“The combined implementation and execution of the One Big Beautiful Bill Act, higher tariff revenue gains, and their effect on growth and investment will inform whether the fiscal trajectory improves or worsens,” S&P added.
Tariffs play a major role in this outlook. Analysts note that with Washington hesitant to raise income taxes, $300 billion to $400 billion a year in tariff revenue is too significant to ignore, meaning tariffs are likely to continue.
However, some reciprocal tariffs are facing legal challenges under the International Emergency Economic Powers Act (IEEPA). A federal appeals court decision is expected by the end of September, though it could come sooner. A letter from Justice Department officials warned that striking down tariffs could have severe economic consequences, including job losses and threats to Social Security and Medicare.
Given how critical tariff revenue is to the U.S. credit rating, a court ruling against them raises questions about whether the U.S. could be downgraded. S&P did not comment.
Not all ratings agencies are as optimistic. Fitch reaffirmed its AA+ U.S. credit rating last week but warned that deficits could worsen despite tariff revenue.
Fitch expects the deficit to shrink this year to 6.9% of GDP from 7.7% in 2024, thanks to a strong economy, stock market, and tariff revenue. But next year, new tax cuts could cause deficits to rise to 7.8% of GDP in 2026 and 7.9% in 2027.
“Government revenues will fall due to additional tax exemptions, expanded deductions for state and local taxes (SALT), and extra deductions for people over 65 included in the OBBBA, despite continued increases in tariff revenues, which Fitch expects to average USD300 billion in both years,” Fitch said.
