US Budget Deficit Hits $2 Trillion in Fiscal 2026 — Third-Largest in American History, CBO Says

The United States ran a budget deficit of nearly $2 trillion in the fiscal year that ended on September 30, according to estimates released Thursday by the Congressional Budget Office (CBO) — the third-largest shortfall in American history, trailing only the two emergency deficits recorded during the COVID-19 pandemic, according to Reason’s analysis of the figures.

The nonpartisan CBO estimated the fiscal 2026 deficit at $1.993 trillion, a $218 billion increase — roughly 12 percent — from the $1.775 trillion deficit recorded in fiscal 2025, Fox Business reported. Federal tax receipts climbed about 3 percent to more than $5.4 trillion, but the growth in revenue was outpaced by a 6 percent rise in federal spending, which reached nearly $7.4 trillion in the CBO’s preliminary data.

The single biggest driver of the spending increase was the cost of servicing the nation’s debt. Net interest expenses on the national debt rose by $115 billion, or 11 percent, from a year earlier — the largest increase of any budget category — as a larger stock of debt combined with higher long-term interest rates, Fox Business reported. Interest payments have become the second-largest item in the federal budget, larger than both defence and Medicare, according to the Committee for a Responsible Federal Budget (CRFB).

The revenue side of the ledger tells a more complicated story than the headline figure suggests. Individual income and payroll tax collections jumped by $255 billion, or 6 percent, reflecting a still-expanding economy with low unemployment. But corporate income tax collections fell by $70 billion, or 16 percent, due in large part to the more generous tax write-offs for investments provided by the 2025 Republican reconciliation bill, The Fiscal Times reported, citing the CBO data.

On the spending side, the three largest mandatory programmes kept growing: Social Security spending rose by $86 billion, or 5 percent, due to increases in average benefits and the number of beneficiaries — the increase would have been larger, the CBO noted, but for a significant set of one-time retroactive payments made under the Social Security Fairness Act. Medicare spending rose by $77 billion, or 8 percent, on higher enrollment and payment rates, while Medicaid spending climbed $55 billion, or 8 percent, on rising per-enrollee costs. Defence spending was $48 billion, or 5 percent, higher than in fiscal 2025, with the largest increases in research and development and military personnel, Fox Business reported.

The CRFB, which published its own estimates on October 1, put the deficit at $2 trillion — 6.2 percent of gross domestic product — with debt held by the public at $32.3 trillion, or 100 percent of GDP, a level not seen since the years immediately after World War II. Interest alone totaled $1.1 trillion, a record 3.4 percent of GDP. Treasury’s own figures through the end of August had already placed the fiscal 2026 deficit at $1.965 trillion, making the $2 trillion full-year estimate consistent with official data, according to Reason.

Why It Matters

The most striking thing about a $2 trillion deficit is not its size but its setting. The last time the deficit approached these levels, the country was fighting a pandemic that had shut down entire sectors of the economy. This time, there was no such emergency: the economy kept growing, unemployment stayed low, and tax receipts actually rose. The shortfall widened because spending grew twice as fast as revenue — a structural gap, not a crisis-driven one.

That is the point budget experts keep returning to. “Running $2 trillion deficits in a growing economy with low unemployment and no major emergency situation going on is an unsustainable trend,” Shai Akabas of the Bipartisan Policy Center told The Wall Street Journal, as reported by The Fiscal Times. When a government borrows at this pace in good times, it spends its fiscal firepower before the bad times arrive — leaving less room to respond when a recession, a war, or another pandemic eventually does.

The arithmetic of the debt is becoming the budget’s main story. Interest payments of $1.1 trillion now consume more than 20 percent of federal tax dollars, according to Carolyn Bourdeaux, executive director of Concord Action, the advocacy arm of the Concord Coalition, which has renewed its call for a fiscal commission to tackle the problem. Because the Treasury keeps refinancing older, lower-rate debt at today’s higher rates, interest costs will likely continue climbing for years even if new borrowing stopped tomorrow — a self-reinforcing cycle in which deficits create debt, debt creates interest, and interest deepens the deficit.

This is where fiscal policy collides with monetary policy. The Federal Reserve raised its policy rate in September to a 3.75–4.00 percent range, and officials including Governor Christopher Waller and St. Louis Fed President Alberto Musalem have signalled in recent days that further increases are likely in the coming months. Every quarter-point of higher rates makes the government’s borrowing more expensive — which means the Fed’s fight against inflation and the Treasury’s debt burden are working against each other, a tension that will only grow if rates stay elevated.

The revenue numbers also puncture a popular political claim. President Donald Trump has repeatedly said tariffs are bringing in “trillions” of dollars for the United States, but the CBO’s data shows corporate and other receipts falling far short of that rhetoric — corporate income tax collections actually dropped 16 percent, partly because the 2025 reconciliation bill’s investment write-offs reduced the taxable base. Whatever tariffs contributed, they were not remotely enough to close a $2 trillion gap.

The politics of the deficit are as revealing as the economics. The widening shortfall is a bipartisan creation: the reconciliation bill that cut corporate receipts was a Republican project, while the entitlement programmes driving most of the spending growth are defended fiercely across party lines and largely shielded from the annual appropriations process. Neither party has an electoral incentive to fix it — benefit cuts anger voters, and tax increases do too. As Reason noted, the debt milestone is evidence of chronic overreach spanning both parties.

Bond markets have taken notice. US Treasury yields have been hovering near multidecade highs through the week, according to Dow Jones Newswires, with rising yields spreading to mortgage bonds and other debt markets — a cycle that makes every new dollar of government borrowing more expensive. The CBO’s February 2026 baseline projected gross federal debt of $39.4 trillion by the end of fiscal 2026, rising to $43.3 trillion by the end of 2028 — but that forecast was completed before the US war with Iran began, meaning actual figures are likely to exceed it, as reported via Reason’s analysis of the CBO data. Fiscal watchdog groups, including the Committee for a Responsible Federal Budget, have repeatedly warned that the current pace of borrowing is unsustainable and that rising interest costs risk crowding out spending on other national priorities in the years ahead.

What to watch next: the CBO’s final figures, which may revise the preliminary $1.993 trillion; whether the midterm elections on November 3 produce any mandate for fiscal restraint or a commission; how the Fed’s expected December rate decision feeds through to borrowing costs; and whether the administration’s tariff revenues, which it continues to tout, show up in the fiscal 2027 data in any meaningful way. The Concord Coalition’s fiscal commission idea has been revived before and gone nowhere — but at $1.1 trillion in annual interest alone, the cost of doing nothing is becoming its own argument.

Sources

• Fox Business — “Federal budget deficit hits nearly $2T as national debt costs surge”
• The Fiscal Times — “Deficit Rose to $2 Trillion for 2026 Fiscal Year: CBO”
• Reason — “The federal budget deficit for the fiscal year is third-largest in American history”
• Political.org — “Federal Deficit Hit $2 Trillion in Fiscal 2026 as Debt Concerns Deepen”