US budget deficit nears $2tr, largest since 2021

The US federal budget deficit surged to nearly $2 trillion this fiscal year, its largest in five years, driven by higher government spending, rising interest payments on government bonds and tariff refunds.

The Treasury Department announced Friday (local time) that the federal deficit for fiscal year 2026 totaled $1.99 trillion, up about 12 percent from the previous year and the largest since 2021.

In historical terms, it is the third-largest deficit on record, behind only the massive stimulus-driven shortfalls of 2020 and 2021 during the COVID-19 pandemic.

The result extends the United States' streak of consecutive budget deficits to 25 years. The last surplus was recorded in 2001.

Both revenues and outlays hit all-time highs, but spending outpaced income. Outlays rose 6 percent to $7.4 trillion, while revenues grew just 3 percent to $5.4 trillion.

Interest payments on government debt were a major driver of the widening deficit. Accumulated national debt and higher borrowing costs pushed interest payments to a record $1.36 trillion.

The two largest spending categories also expanded: Social Security outlays reached $1.67 trillion and Medicare spending climbed to $1.07 trillion.

Tariff revenues, however, fell short of expectations as a deficit-reduction tool. The Supreme Court struck down a significant portion of President Donald Trump's tariff increases in February, triggering a wave of refunds.

A Treasury official estimated that the deficit as a share of GDP rose to about 6.2 percent this year from 5.8 percent the previous year. Treasury Secretary Scott Bessent has set a target of reducing that ratio to around 3 percent.

The widening deficit could also weigh on Republicans ahead of November's midterm elections. Heavy government bond issuance and elevated interest costs may narrow the room for fiscal maneuver going forward, and rising bond yields could push up borrowing costs for households, including mortgage rates.

Nancy Vanden Houten of Oxford Economics said the US deficit is likely to remain at a similar level next year, but warned that a prolonged war with Iran could push it even higher.