CRFB Report: Cutting the $2 Trillion Deficit Could Ease Inflation and Lower Interest Rates for Households

Curbing the federal government’s roughly $2 trillion budget deficit would significantly alleviate the affordability challenges facing American households, according to a new analysis.

The nonpartisan Committee for a Responsible Federal Budget (CRFB) released a report Wednesday detailing how narrowing the federal budget deficit over the near and long term could improve affordability through fiscal policy adjustments to taxation and spending.

CRFB finds that deficit reduction can boost affordability by tempering inflation, lowering interest rates, easing cost pressures stemming from government policies, spurring private investment, and preventing future affordability crises driven by the insolvency of Social Security and Medicare.

“Fiscal policy alone cannot solve all affordability challenges,” CRFB noted, adding that monetary policy, regulation, and policies related to housing, trade, foreign affairs, labor, and education—at the state and local levels as well—are also significant factors. “But responsible fiscal policy can play an important role.”

The federal government is running a roughly $2 trillion budget deficit this fiscal year. (J. David Ake/Getty Images)

Conversely, the group wrote, expansionary fiscal policy—attempts to ease affordability concerns with subsidies, tax cuts, or spending measures financed by borrowing—is likely to worsen affordability challenges over time by fueling inflation, raising interest rates, and increasing the cost of the subsidized goods or services.

CRFB said that fiscal policies geared toward deficit reduction, such as higher taxes or restrained federal spending and transfers, reduce excessive consumer spending and the inflationary pressures burdening households.

Reducing inflation, which has remained above the Federal Reserve’s 2% target for five-and-a-half years and currently sits at about 3.4% year-over-year, would also give the central bank room to lower short-term interest rates.

“Deficit reduction lowers interest rates through two channels,” the report said. “First, lower deficits reduce inflationary pressure and thus make it easier for the Federal Reserve to cut short-term interest rates (or reduce the need for the Fed to increase interest rates). Second, a lower stock of debt reduces the interest rates the Treasury needs to offer on long-term debt to attract buyers.”

Reducing federal deficits can reduce inflationary pressures that hit household budgets. (Spencer Platt/Getty Images)

CRFB noted that the Congressional Budget Office (CBO) estimates every 1 percentage point reduction in the debt-to-GDP ratio lowers interest rates by roughly 2 basis points. That implies current interest rates are about 1.5 percentage points higher than they would be if the U.S. debt-to-GDP ratio had remained at 2001 levels instead of tripling over the last 25 years.

Healthcare costs represent a key area where government reforms within programs like Medicare and Medicaid can reduce expenditures for both the government and consumers. For example, CRFB highlighted policies to lower drug prices, reduce overpayments, and reform provider payments, which can lower premiums and coinsurance costs for Medicare enrollees.

Lower federal deficits can also stimulate private investment. The CBO estimated that every dollar of federal borrowing “crowds out” about 33 cents of private investment, meaning firms invest less in areas that could boost productivity and workers’ wages.

CRFB cited CBO’s 2025 findings that stabilizing the debt as a share of GDP would boost real per-person income growth by one-tenth over the next three decades compared to the baseline, and by over 44% compared to a high-debt scenario.

Reducing budget deficits reduces the risk of a fiscal crisis and gives the government more flexibility during recessions, CRFB noted. (Elizabeth Frantz/File Photo/File Photo/Reuters)

That would translate to income per person growing by $46,500 with stabilized debt, versus $32,350 if debt rises rapidly—an increase of about $14,250 individually and nearly $36,000 per household under a stabilization scenario.

Cost reductions and new tax revenues to shore up the solvency of Social Security and Medicare would also help prevent an affordability crisis for seniors, who would face immediate benefit cuts if the trust funds financing those programs are depleted within the next decade as currently projected.

Social Security faces an estimated 22% shortfall in 2032 when its trust fund is projected to run dry, which would trigger an automatic 22% benefit cut—roughly $500 per month in current benefits.

CRFB added that deficit reduction could help the U.S. better weather future recessions, which create affordability challenges through higher unemployment, slower income growth, and increased government spending on relief programs. It would also stave off a potential fiscal crisis driven by excessive national debt growth.

“Responsible deficit reduction is not just an abstract concern for fiscal policymakers focused on aligning spending and revenue; it is one of the most powerful levers policymakers have to make daily life more affordable for American families,” CRFB said.

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