US debt faces a severe test! Trump's 2027 budget proposal to be unveiled on Friday: Focused on increasing military spending and reducing healthcare benefits, cautioning against deficit risks.

President Trump will announce the budget plan for the 2027 fiscal year on Friday, which will be centered around massive defense construction to build his party's midterm election campaign strategy, with some funds being raised by cutting domestic institutions and medical welfare programs. Using tax revenue for Pentagon governance in the context of the Iran war is a political risk for the White House, especially with rising gasoline prices. Trump may also face resistance from within his party for his proposed budget cuts to health and science institutions, which were rejected by both parties in Congress last year. Trump was once a fiscal hawk - in 2016, he said he believed he could achieve a balanced budget within five years - but by the end of his first term, the US added $7.8 trillion in debt. His 2027 proposal is expected to update the current ten-year deficit forecast of around $16 trillion. In last year's tax reform plan, Trump fulfilled many of his campaign promises, calling it a "grand and beautiful law." The Trump administration has said that the $4 trillion cost of tax cuts will be fully paid for in the next ten years through additional tariff revenues - however, the Supreme Court rejected his emergency power to impose most tariffs. Trump has already begun working on alternative plans to replace these tariffs, but the process is more complex - his idea of giving taxpayers a $2000 refund is also complex and requires Congressional approval. Democrats have made "affordability" a core theme of their campaign, aiming to regain control of both houses of Congress in November. They are likely to use Trump's budget proposal to highlight Republican cuts to healthcare and social security projects. Here are some key points to watch out for: Deficit and Debt The 2027 fiscal year budget will be Trump's first comprehensive agenda for his second term, with accompanying data support. Last year's budget lacked detailed line-item expenditure targets and economic assumptions needed to forecast the long-term costs of his proposals. US Treasury investors will closely watch whether current debt and deficit levels rely too heavily on overly optimistic economic data prior to the Iran war, and whether they rely on spending cuts that are difficult to pass through a Senate facing Democratic opposition. Any doubts about the sustainability of US public debt could lead to a rise in long-term US Treasury yields. Forecasts Any economic assumptions in the President's budget proposal may be outdated before they are even announced. The five-week war with Iran has caused oil prices to spike, inflation expectations to rise, and lowered expectations for further rate cuts by the Federal Reserve. In March, economists raised their inflation forecasts for this year while lowering growth forecasts. The preferred inflation indicator for the Federal Reserve - the Personal Consumption Expenditures Price Index (PCE) - is expected to average a 3.1% increase this year, up from 2.6% in the pre-war February survey. Gross Domestic Product (GDP) is expected to grow by an average of 2.3%, lower than the previously predicted 2.5%. White House economic forecasts have historically been optimistic. This is why Congress established the non-partisan Congressional Budget Office (CBO) in the same law that regulates the President's annual budget proposal. The CBO forecasts a 2.2% GDP growth rate for 2026. Nevertheless, US debt buyers will closely watch how the White House views these key indicators. Tariff Refunds After the Supreme Court overturned some of Trump's tariff policies, the government collected about $150 billion in tariffs that must be refunded to taxpayers. Importers who paid these tariffs will receive priority refunds, but Trump also proposed giving individual taxpayers a one-time "tariff bonus" of $2000. Such a move may be popular in an election year, but it could still face opposition in Congress. Even with a simplified budget reconciliation process, the proposal will require near-unanimous support from House Republicans, who hold a slim majority of 217 to 214. Some fiscal hawks within the party have openly opposed the idea. House Budget Committee Chairman Jodey Arrington stated last year that he would prefer to use tariff revenue to reduce the deficit rather than for refunds. Senate Majority Leader John Thune also expressed doubts. Department of Government Efficiency (DOGE) "Slimming Plan" Last year, Trump returned to the presidency with ambitious plans to shrink the size and functions of the federal government. With the help of Tesla CEO Elon Musk and his leadership of the Department of Government Efficiency, the Trump administration has already cut the number of civilian federal employees by over 12% compared to the last month of the Biden presidency. However, Congress has mostly rejected efforts to legislate these cuts permanently. While Congress revoked appropriations previously authorized for the US Agency for International Development, it also rejected proposals to cut domestic medical and social security programs. Political factors in an election year make further spending cuts more difficult. With regular appropriations processes failing, Congress increasingly relies on end-of-year temporary funding bills to maintain current spending levels and avoid government shutdowns. For most government agencies, their funding has been allocated until September 30. Attempting to significantly reduce spending could result in a government shutdown in the month before the midterm elections. However, Republicans have a trump card. They can use the same budget reconciliation rules as the Trump 2025 tax reform plan to push for long-term funding for the Department of Homeland Security - currently stalled due to the longest government shutdown in history - and counter Trump's proposed cuts. This would bypass the inevitable obstruction by Senate Democrats, but would require almost unanimous agreement among divided House Republicans.