The latest monthly budget report from the Congressional Budget Office shows the federal deficit totaling $601 billion in the first quarter of fiscal year 2026. That’s about $110 billion lower than the same period last year. Revenues rose by $141 billion, while outlays increased by just $31 billion. At a glance, the numbers suggest modest improvement.

But the source of that improvement matters.

The deficit is smaller largely because revenues are up, not because spending is under tighter control. And a striking share of that revenue growth is coming from tariffs. CBO estimates that customs duties brought in $91 billion during the first quarter, up from $21 billion a year earlier. That $70 billion increase accounts for roughly half of the total rise in receipts over the period.

That kind of revenue growth is real, but it’s also unusual. Tariff collections can surge quickly when rates rise, but they depend heavily on policy choices, exemptions, trade flows, and enforcement. CBO’s own estimates of tariff revenue have swung by more than a trillion dollars in just a few months as rates were adjusted, exemptions expanded, and new data came in. More than a third of imports are already exempt from recent tariff increases, and tariff policy has changed repeatedly over the past year. A negotiated exemption, an administrative shift, or a court ruling can alter expected collections with little warning.

CBO is explicit about another limitation. The monthly numbers capture what’s collected at the border, but they do not yet reflect the broader economic effects of higher tariffs. Tariffs raise revenue by taxing trade, and taxing trade tends to reduce trade over time. Higher costs, altered supply chains, and weaker exports don’t show up immediately in quarterly deficit figures, but they matter for future growth and future tax receipts. CBO has said those effects will be incorporated into its next full economic and budget outlook.

None of this shows up as a crisis in the December report. That’s precisely why the report is worth reading closely. The deficit looks smaller this quarter, but it rests heavily on a revenue source that is volatile and incomplete as a measure of fiscal health. Stay tuned.