Fiscal deficit for 2026 reaches $1.99 trillion

Up 12% from prior year, largest since 2021

Deficit-to-GDP ratio seen exceeding 6%

Tariff revenue blocked, Treasury yields spike

US President Donald Trump is captured through a camera viewfinder during a midterm election campaign event in San Antonio, Texas, on Wednesday (local time). [Reuters-Yonhap]
US President Donald Trump is captured through a camera viewfinder during a midterm election campaign event in San Antonio, Texas, on Wednesday (local time). [Reuters-Yonhap]

The United States ran a federal budget deficit of $1.99 trillion in fiscal year 2026, the largest shortfall in five years.

With the deficit approaching the $2 trillion mark, concerns over the fiscal health of the federal government are mounting. President Donald Trump had counted on a surge in tariff revenue from his global trade war, but court rulings blocking those levies as unlawful undercut that plan. Compounding the problem, soaring Treasury yields threaten to pile on additional interest costs, potentially widening the deficit further. The Federal Reserve's continued rate-hiking cycle is adding to the pressure on the Trump administration.

The Congressional Budget Office estimated the federal deficit for fiscal year 2026 — which ran from October 2025 through September 2026 — at $1.99 trillion, the Wall Street Journal reported Thursday (local time). The figure is the CBO's preliminary tally for the fiscal year that ended Sept. 30.

The figure represents a 12 percent increase from the prior year and is the largest deficit since 2021.

Federal spending for the same period rose 6 percent year-on-year to $7.4 trillion, while revenue grew only 3 percent to $5.4 trillion.

The deficit as a share of GDP is expected to exceed 6 percent this year, up from 5.8 percent the year before.

"Running a $2 trillion deficit in a growing economy with low unemployment and no major emergency is an unsustainable trajectory," warned Shai Akabas, vice president for economic policy at the Bipartisan Policy Center.

Since taking office last year, the Trump administration has pursued spending cuts — including reductions in the federal workforce and rollbacks of clean-energy tax credits — but those efforts have done little to improve the fiscal picture.

The tariff revenue windfall Trump had anticipated failed to materialize, partly because the Supreme Court ruled the tariffs unlawful, triggering refunds. Tariff receipts actually fell compared with the prior year.

Republicans also extended existing tax cuts and enacted additional reductions, further eroding the revenue base. Corporate tax receipts fell 16 percent this year as a result.

Ballooning interest payments on government debt are adding to the fiscal strain.

Net interest payments on government bonds reached $1.1 trillion this year, up 11 percent from the prior year.

The increase in interest payments alone accounted for more than half of the total rise in the deficit. Total interest outlays exceeded both defense spending and Medicare expenditures.

The full impact of the recent sharp rise in Treasury yields has yet to be reflected in the fiscal accounts, raising concerns that interest costs could climb even higher. The yield on the 10-year Treasury note hit 5.366 percent during trading on Wednesday (local time), while the 30-year yield reached 5.732 percent — the highest levels for each since 2002.

The benchmark interest rate is a central variable. Amid the growing fiscal burden, the Federal Reserve raised its benchmark rate by 25 basis points last month to a range of 3.75 to 4.00 percent — its first increase since 2023. Higher rates mean greater interest costs on newly issued or refinanced government bonds.

A majority of Fed officials view one additional rate increase this year as appropriate. According to the CME FedWatch tool, the probability of a hike in October has fallen sharply to 18.3 percent, while the odds for December stand at around 80 percent. The primary driver of further tightening is upward inflationary pressure on prices.

Against this backdrop, Trump has repeatedly pressed the Fed to cut rates. He renewed his criticism of the central bank after 30-year mortgage rates surged to 7.49 percent, the highest since the start of his second term. Asked about the record, Trump said, "I think the board would like to see the country not do well."


killpass@heraldcorp.com