Twenty Percent Cut to Federal R&D Would Cost the US Economy $1 Trillion Over Next 10 Years, New Report Finds

WASHINGTON-Cutting federal investments in research and development (R&D) may appear to save billions in the budget, but it would cost the economy trillions. A 20 percent reduction in federal R&D would shrink the U.S. economy by up to nearly $1.5 trillion over 10 years, according to a new report by the Information Technology and Innovation Foundation (ITIF).

"Slashing federal R&D funding will not save Americans money; it will reduce long-term economic growth and weaken U.S. competitiveness," said Meghan Ostertag, research assistant for economic policy at ITIF. "A 20 percent cut would trim government spending by $620 billion over 10 years, but it would shrink the economy by nearly $1 trillion and lower tax revenue by almost $250 billion, wiping out much of the short-term budget savings."

The Trump administration's proposed fiscal year 2026 budget calls for steep reductions to nondefense discretionary spending, including cuts of up to half for certain research agencies. Yet R&D is a key driver of productivity and, therefore, GDP growth. Every annual cut to public R&D reduces the stock of knowledge for years to come, compounding GDP losses and tax revenue declines.

ITIF's report models the economic impact of a 20 percent federal spending cut beginning in 2026 compared with 3 alternatives: 1) maintaining the 2025 R&D budget amount; 2) maintaining the 2025 R&D investment level as a share of U.S. GDP; and 3) keeping pace with China's R&D investment level as a share of its GDP.

The analysis finds that over 10 years, a 20 percent cut would:

• Reduce government spending by $407 billion compared with holding 2025 funding flat and by $620 billion compared with maintaining R&D intensity as a share of GDP.
• Lower U.S. GDP by $717 billion compared with maintaining the 2025 budget level, by $995 billion compared with maintaining R&D intensity, and put the U.S. economy $1.46 trillion behind China's expected growth.
• Forego between $179 billion and $366 billion in potential federal tax revenue due to lost GDP growth.

The report underscores that public R&D is an indispensable input for innovation, leading to new products, improvements to existing ones, and ultimately, business expansion. Federal R&D increases the number of patents filed, start-ups launched, and firms that enter the export market. It also supports high-risk basic research often avoided by private firms and "crowds in" private-sector investment.

Seventy percent of federal R&D dollars flow to universities and labs that train the next generation of STEM talent and attract top international researchers. Cuts would also weaken the U.S. workforce by narrowing the Ph.D. pipeline and pushing scientists abroad.

"Federal R&D investment is the bedrock of the U.S. innovation ecosystem, catalyzing private-sector activity that has propelled America to global leadership in technologies such as semiconductors, AI, and more. Yet for over a decade, U.S. investment as a share of GDP has stagnated," said Ostertag.

Beyond the macroeconomic effects, the report warns that scaling back R&D, particularly in critical technologies, would undermine U.S. competitiveness just as China pursues a long-term, state-backed strategy to achieve technological self-sufficiency and global leadership in advanced industries. ITIF urges the U.S. government to adopt industrial policies that intensify R&D funding and encourage private-sector investment.

"Strategic competition with China requires sustained, predictable, and increased public R&D investment paired with private-sector support," said ITIF President Robert D. Atkinson. "While the United States threatens deep cuts, China is rapidly catching up and may have already surpassed the United States in total research spending. If we disinvest while China does the opposite, the outlook for U.S. technological competitiveness is grim."

U.S. gross expenditure on R&D totaled $823 billion in 2023, compared with China's $781 billion. However, between 2019 and 2023, China's average annual R&D investment grew nearly twice as fast as that of the United States. At that pace, China likely overtook the United States in 2024.

"In today's techno-economic war with China, reducing federal R&D would be self-defeating-and our model shows just that. President Trump and Congress should weigh the long-run growth effects alongside near-term budget considerations and resist the temptation to slash these critical investments," said Atkinson.

Read the report.

Contact: Sydney Mack, [email protected]