Trump’s Iran Strike Adds Fresh Pressure to $38.5 Trillion US Debt, Warns UBS
Financial markets reacted in what economists described as a rational manner after hostilities erupted between the United States and Iran over the weekend. While the humanitarian consequences remain paramount, attention quickly shifted to the economic implications.
UBS highlights four economic risks from Trump’s Iran action: higher oil, Red Sea trade threats, rising deficits, and tariff refunds hitting U.S. finances.
Energy desks are now at the center of the storm. Disruptions to supply chains are broadly expected following the unrest in the Middle East, and parts of that risk have already been reflected in commodity prices.
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According to Paul Donovan, global chief economist at UBS, four macroeconomic themes stand out. The first is the effect of rising crude prices on inflation. For U.S. analysts already sensitive to affordability pressures, any sustained increase could complicate the outlook.
Second is the vulnerability of shipping lanes. The Houthi movement, based in Yemen, may target vessels transiting the Red Sea. This passage is a vital conduit between Asia and Europe and connects through the Suez Canal to the Mediterranean. Should access be restricted in the southern corridor near Yemen, ships would need to detour around Africa, increasing transit times and costs.
Donovan characterized oil prices and shipping delays as nearer-term issues. The more enduring challenge lies in financing another foreign engagement at a time when U.S. debt has surpassed $38.5 trillion.
Economists are less focused on eliminating that total than on slowing its growth. Proposals to trim the annual deficit to 3% of GDP have circulated as a means of curbing accumulation. Yet President Donald Trump has indicated operations could continue for several weeks, and reports suggest weapons inventories require swift replenishment—factors that may expand the deficit.
Donovan observed that while the immediate fiscal impact might not be dramatic, it could be noticeable when paired with anticipated tariff refunds.
Revenue Pressures After Court Ruling
The fiscal picture has been further complicated by a decision from the Supreme Court of the United States. The court ruled that the legal justification for numerous tariffs introduced in 2025, including the administration’s “Liberation Day” measures, was invalid. Approximately $175 billion in collected duties will be redirected through international trade courts for repayment to American companies.
The process is expected to stretch over years. Treasury Secretary Scott Bessent has said revenues gathered under the International Emergency Economic Powers Act last year are effectively gone. Even so, he insists the broader trajectory of tariff income will not weaken, pointing to a newly applied 10% levy on global partners.
Budget watchdogs remain uneasy. Before the Middle East escalation, Maya MacGuineas, who leads the Committee for a Responsible Federal Budget, warned that recent policies have added materially to the national debt. She projected interest payments nearing $17 trillion between now and 2036, with yearly costs climbing from over $1 trillion in 2025 to more than $2 trillion by 2035.
Beyond the U.S., Donovan said the conflict is likely to restrain growth across the Middle East. In Gulf economies, even though peak tourist season has ended, heavy social media coverage may cause reputational harm and influence the choices of globally mobile wealthy individuals.
