FILE PHOTO: The US budget deficit rises to $1.99 trillion in fiscal 2026, with debt service costs reaching a record $1.36 trillion. | Photo Credit: Ken Cedeno
The U.S. budget deficit will rise by $217 billion to nearly $2 trillion in fiscal year 2026, driven in part by tariff refunds and record spending to pay down more than $40 trillion in national debt, marking the largest budget shortfall in five years, Treasury Department figures showed on Friday.
Continued increases in spending for social benefit programs like Social Security and Medicare and a $48 billion jump in defense spending are also factors in the increase.
The deficit reached $1.99 trillion
The $1.99 trillion deficit for the year ended Sept. 30, the first full budget year of President Donald Trump’s second term, rose from $1.78 trillion in fiscal 2025. It was the largest shortfall since the $2.77 trillion fiscal 2021 budget gap, then boosted by COVID-19 as the largest annual relief spending.
Total receipts for fiscal 2026 are a record $5.40 trillion, up $169 billion, or 3 percent, from $5.24 trillion in fiscal 2025.
Fiscal 2026 spending is also a record $7.40 trillion, up $386 billion, or 6 percent, from $7.01 trillion in the previous fiscal year.
Debt servicing costs are a record $1.36 trillion
Debt service spending was $1.36 trillion, an increase of $144 billion, or 12 percent, a spending category now eclipsed only by Social Security and the combined costs of Medicare and Medicaid. Total US debt breached the $40 trillion milestone about two months ago.
Reimbursement rates increase the deficit
Another driver of the widening shortfall is the $22 billion drop in net tariff receipts after this year’s Supreme Court decision negating a large portion of the tariffs Trump had imposed during his first year in office. This led to $145 billion in rate refunds this year, resulting in an 11 percent drop in net rate income to $173 billion.
Defense spending increased by 6 percent
Defense spending for the year rose 6 percent to $917 billion. US Treasury officials said it was unclear how the increase could be linked to the war that Trump and Israel started against Iran earlier this year.
The deficit-to-GDP ratio rose to 6.2 percent
Treasury officials said the department calculated a deficit-to-GDP ratio of about 6.2 percent for fiscal 2026, but declined to say what GDP estimate they were using. This figure compares with a deficit-to-GDP ratio of 5.8 percent real for fiscal 2025.
For the last month of fiscal year 2026 in September, the Treasury reported a deficit of $27 billion compared to a surplus of $198 billion a year earlier.
Published on October 17, 2026