How much will the government increase spending in 2025?

The "One Big Beautiful Bill Act" enacted significant tax policy changes. Formally known as H.R. 1, this primary legislative vehicle of summer 2025 was signed into law by President Donald Trump on July 4, 2025, extending expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The bill originated in the House of Representatives ^[2], passing on May 22, 2025, with a vote of 218-214 ^[3]. An amended version subsequently passed the Senate on July 1, 2025, with a narrow 51-50 vote, requiring Vice President JD Vance to cast the tie-breaking vote ^[4]. Its contentious passage utilized the budget reconciliation process to bypass the Senate's 60-vote filibuster threshold.

The legislation projected a substantial federal deficit increase. It enacted tax cuts totaling approximately $4.3 trillion to $4.5 trillion over the ten-year budget window ^[1]. These cuts were partially offset by approximately $1.2 trillion in spending reductions and other measures ^[1]. Consequently, the Joint Committee on Taxation (JCT) estimated the net impact on the federal deficit to be approximately $3.2 trillion over the ten-year period ^[1]. Key provisions for individuals included making permanent the TCJA's individual income tax rates and brackets, maintaining the doubled standard deduction, increasing the child tax credit, and raising the State and Local Tax (SALT) deduction cap to $40,000 for tax years 2025 through 2029 ^[5]. For businesses, the bill permanently established the 20% deduction for qualified business income for pass-through entities, enhancing it to 23%, and permanently set 100% bonus depreciation for eligible investments ^[5].

A hypothetical 1.5 percentage point downward revision to the 2025 real GDP growth forecast would significantly increase U.S. federal mandatory outlays. Such a revision, based on CBO's official 'Rules of Thumb', is estimated to increase FY2025 mandatory outlays in the range of $90 billion to $115 billion. This impact is not derived from CBO's fiscal multipliers, which measure the effect of policy changes on GDP and typically range from 0.5 to 2.5 for direct government purchases ^[3]. Instead, the increase in outlays is primarily driven by automatic stabilizers.

Automatic stabilizers drive this increase in spending during economic downturns. These programs, such as Unemployment Insurance, the Supplemental Nutrition Assistance Program (SNAP), and Medicaid, automatically expand federal spending, providing a counter-cyclical response without requiring new legislation ^[1]. Based on CBO methodologies, a 1.5 percentage point widening of the output gap is estimated to increase the federal deficit by about 0.6% of potential GDP, with approximately half of this amount attributed to higher mandatory spending. The baseline 2025 real GDP growth forecast, according to the Philadelphia Fed's Survey of Professional Forecasters, currently stands at 1.9% ^[2].

The Biden Administration requested significant supplemental funding for disaster relief in FY2025. The administration sought approximately $98.4 billion in emergency supplemental funding for Fiscal Year 2025, primarily for recovery efforts from catastrophic natural disasters, including Hurricanes Helene and Milton ^[1]. A substantial portion of this request, $40 billion, was earmarked to replenish FEMA's Disaster Relief Fund (DRF), which had diminished to a critical balance of $3.6 billion by late November 2024 ^[1], ^[3]. Additional key requests included $3.3 billion for the Department of Defense (DoD) to repair storm-damaged military facilities and $310 million for the State Department's International Boundary and Water Commission (IBWC) for wastewater infrastructure ^[4], ^[5].

Congressional appropriations partially addressed these requests, creating a notable funding gap for FEMA. In response to the administration's appeal, Congress enacted the American Relief Act, 2025, which appropriated $29 billion for the FEMA DRF and $3.4 billion for DoD facility repairs ^[2]. While this legislation provided partial relief and averted an immediate crisis for the DRF, an $11 billion disparity exists between FEMA's requested amount and the congressional appropriation, indicating potential future budgetary strain for the agency ^[1], ^[2]. FEMA's broader FY2025 strategic priorities further include an allocation of $1 billion for pre-disaster mitigation through the BRIC Program and maintaining a $2 billion reserve within the DRF for initial operations for new catastrophic events ^[6].

A dynamic model projects significantly higher FY2025 net interest outlays than the CBO. The Congressional Budget Office (CBO), in its January 2025 report, projected federal net interest outlays for Fiscal Year 2025 to be $410 billion. However, a dynamic model incorporating real-time market data from CME FedWatch futures and Treasury Quarterly Refunding Announcements presents a higher estimate of $435 billion for FY2025. This difference amounts to $25 billion, or 6.1%, highlighting a significant understatement by the CBO's static assumptions, which fail to capture the latest market-based expectations for Federal Reserve monetary policy and the Treasury's debt issuance strategy.

Differences in interest rate forecasts and debt strategy primarily drive this divergence. This is primarily driven by two factors. The most significant is the differing outlook on the federal funds rate: the CBO's forecast assumed a 4.0% year-end rate, whereas the dynamic model, using market data, suggests a more hawkish 5.5% peak rate held through mid-year. This higher rate path accounts for approximately $15.6 billion, or 3.8%, of the total discrepancy. Additionally, the specifics of the Treasury's debt refinancing and issuance strategy, detailed in the April 2025 Quarterly Refunding Announcement, contribute an estimated $9.4 billion, or 2.3%, to the higher projected costs.

The projected shortfall creates fiscal challenges and highlights budget sensitivity to markets. The estimated $25 billion shortfall represents a material, unbudgeted increase to the FY2025 deficit, complicating fiscal planning and potentially increasing future borrowing. This analysis also underscores the federal budget's acute sensitivity to market shifts, estimating that a 10-basis-point parallel shift in the 10-year Treasury yield could alter FY2025 net interest outlays by $2.8 billion. The dynamic, market-implied forecast therefore offers a more realistic assessment for policymakers and market participants in navigating the U.S. fiscal landscape.

Initial U.S. federal outlay figures consistently undergo revisions, particularly for defense spending. These figures typically see upward adjustments due to structural factors, including reporting lags of up to 90 days for contract obligations and persistent financial management weaknesses within the Department of Defense. Consequently, final audited defense outlays are frequently higher than initially reported ^[3], ^[1].

Medicare reimbursements, especially for Medicare Advantage, are poised for significant downward revisions. The Medicare Advantage (MA) program's improper payment rate increased to 6.09% in FY2025, partly due to aggressive coding practices, in contrast to decreasing Medicare Fee-for-Service improper payment rates (6.55% in FY2025). A major contributing factor to downward revisions is the Centers for Medicare & Medicaid Services' (CMS) dramatic expansion of its Risk Adjustment Data Validation (RADV) audits for MA plans. This includes annual audits for all eligible contracts and clearing a backlog from previous years, an intensified recovery effort expected to identify and offset billions in overpayments, thus creating substantial downward pressure on final Medicare outlays ^[2], ^[4].

Fiscal Year 2025 is projected to be a peak adjustment year for federal outlays. The opposing forces of upward revisions in defense spending and robust downward adjustments stemming from Medicare Advantage audit recoveries are expected to converge. The accelerated CMS audit schedule significantly increases the likelihood that the final audited federal spending figure for FY2025 will be materially different, and potentially lower, than initial reports, influencing predictions on overall government spending increases ^[2], ^[4].

The prediction market's outcome regarding government spending increases in FY2025 primarily hinges on potential revisions to the initially reported figures ^[1]. Bullish catalysts, which could suggest a larger increase, include any forthcoming final audits or detailed reports from the Treasury Department or the Congressional Budget Office (CBO) that present upward revisions to the previously reported $275 billion or 4% increase in FY2025 outlays over FY2024 ^[2]. Additionally, if subsequent analysis or specific program data reveals that the spending increases within the "One Big Beautiful Bill Act" (OBBBA) for FY2025 had a greater fiscal impact than projected, this could also push for a higher perceived increase ^[3]. Conversely, bearish catalysts, suggesting a smaller increase, would involve downward revisions to these FY2025 spending figures ^[4]. If final reconciliations or detailed analyses from the Treasury or CBO report a smaller increase in FY2025 spending compared to FY2024, this would act as a bearish factor ^[5]. Moreover, while directly pertaining to FY2026, a highly contentious and fiscally conservative resolution to ongoing FY2026 budget negotiations and appropriations could, in rare instances, prompt a re-evaluation or stricter interpretation of prior year spending, or more prominently highlight spending offsets ^[6]. Investors will closely monitor official data releases and ongoing political developments before the April 1, 2026, settlement date ^[7]. Any final revisions to FY2025 spending data, expected in March 2026, will be particularly critical ^[8]. The political climate and final spending outcomes from ongoing FY2026 budget negotiations in February and March 2026 could also influence market sentiment regarding overall fiscal trends and the interpretation of the FY2025 figures ^[9].