US Budget Deficit Hits $1.99 Trillion for Fiscal 2026, Up 12% and Largest Since 2021

The Treasury Department reported Friday that the federal budget deficit reached $1.992 trillion for fiscal year 2026, which ended September 30, a 12% increase from the $1.775 trillion shortfall recorded the prior year. The figure makes fiscal 2026 the third-largest annual deficit in US history, behind only 2020 and 2021, when pandemic stimulus drove federal spending to extraordinary levels. It also marks the 25th consecutive fiscal year in which the government spent more than it collected, and amounts to roughly 6.2% of gross domestic product.

Several forces drove the widening gap. Net interest payments on the public debt exceeded $1 trillion for the first time, rising 11% as the national debt and persistently high interest rates compounded borrowing costs, with 10-year Treasury yields above 5%. Federal outlays climbed 6% to roughly $7.4 trillion, while revenues grew just 3% to about $5.4 trillion. Spending on Social Security, Medicare, and Medicaid rose a combined $217 billion, or 7%. Corporate income tax collections fell $70 billion, or 16%, partly because the 2025 Republican reconciliation bill expanded investment write-offs. Military spending on the Iran war added further pressure, with Pentagon officials estimating costs exceeded $11.3 billion in just the first six days of that conflict.

Tariff policy also weighed on the deficit. After the Supreme Court struck down key elements of the Trump administration's tariff program, the government was required to issue an estimated $130 billion in refunds during the fiscal year, further widening the shortfall. With 10-year yields above 5% pushing mortgage rates toward 7.5%, analysts warn that the combination of high borrowing costs and a structural deficit near $2 trillion is beginning to act as a broad drag on household and government finances alike. The midterm elections are expected to produce divided government, which would likely forestall significant deficit-reduction legislation in the near term.