The U.S. 2026 fiscal year budget deficit is $1.99 trillion, up 12%, with interest expenses reaching a record high.

The U.S. federal fiscal deficit will further widen in the 2026 fiscal year, remaining at a high level of around $2 trillion for the fourth consecutive year. The growing debt burden continues to exacerbate market concerns over the sustainability of U.S. fiscal policy.

Data released by the U.S. Treasury Department on Friday show that the federal budget deficit for the 2026 fiscal year ending in September widened to $1.99 trillion, an increase of about 12% compared to the previous fiscal year’s $1.78 trillion. Expenditures grew about 6% to $7.4 trillion, while revenues rose about 3% to $5.4 trillion, further widening the fiscal gap.

Interest payments surpassed the $1 trillion threshold for the first time, with net interest expenses increasing by $81.4 billion to a record high of $1.05 trillion, making it a major contributor to this year’s deficit expansion.

Additionally, the Trump administration’s 2025 tax cut bill caused corporate income tax revenues to fall by over $70 billion, further weakening the fiscal revenue base.

Treasury Secretary Besent named tariff refunds as one of the key factors for the increased deficit, as these refunds stem from a Supreme Court decision in February this year, which abolished most tariff hikes enforced during Trump’s second term.

On Friday, the yield on the 10-year U.S. Treasury note remained stable, fluctuating by less than 1 basis point.

The 2026 fiscal year deficit accounts for about 6% of gross domestic product (GDP), an unusually high proportion given the currently healthy job market. This marks the fourth consecutive year that the federal deficit has remained near the $2 trillion level.

In terms of expenditure structure, Social Security remains the largest single expense, increasing by $86.4 billion this fiscal year to $1.67 trillion; Medicare spending grew by $76 billion to $1.07 trillion; net interest expenses climbed to $1.05 trillion, ranking among the top three government expenditures.

Notably, the previous fiscal year (2025) saw a nominal narrowing of the deficit, which was mainly the result of an accounting treatment—Republicans’ 2025 tax cut bill tightened restrictions on student loan programs, and the Treasury listed this as a reduction in annual expenditures rather than a real fiscal improvement.

The tax cut bill signed by the Trump administration in 2025 had a significant impact on this year’s fiscal revenues.

Personal income tax revenue increased by $189 billion, but corporate income tax revenue fell by over $70 billion, due to the extension of several tax break clauses and the introduction of new deductions for businesses, which largely offset the net revenue gains.

This year’s surge in U.S. Treasury yields, combined with the continuously expanding government debt base, has made interest expenses a driving factor in the 2026 fiscal year deficit. Last month, the U.S. public debt balance surpassed $40 trillion, setting a new historical high.

On tariff policy, the Supreme Court’s decision in February rendered many of the previous tariff increases invalid, requiring the Treasury Department to refund tariffs, further increasing expenditure pressures. The Trump administration is currently seeking to rebuild the tariff system through legislative measures.

Besent maintains that the U.S. can primarily rely on faster, sustained economic growth to flatten the debt curve, viewing AI-driven productivity gains as an important driver. However, this judgment has been widely questioned.

IMF Managing Director Kristalina Georgieva stated on October 14, "Growth certainly helps, but growth alone cannot achieve the necessary fiscal adjustment fast enough." Besent’s adviser, recently appointed David Zervos, rebutted in an interview with CNBC, asserting that the IMF’s past forecasts were "a mess."

ECB President Lagarde also stated on the same day that the U.S. deficit "needs to be seriously addressed by countries in this situation."

Congressional Budget Office (CBO) Director Phillip Swagel said on October 8 that relying solely on economic growth to stabilize U.S. debt levels "is not credible." In February, the CBO warned that, on the current trajectory, the U.S. debt-to-GDP ratio will surpass the post-WWII peak of 106% before 2030.

Although Besent promises to propose a fiscal consolidation plan, Trump himself continues to signal increased spending, clouding the fiscal outlook with uncertainty.

Trump has called for increasing defense spending by nearly $500 billion and promised that, if Republicans retain control of both the House and Senate in next month’s midterms, he will issue $5,000 checks to every American citizen.

Besent stated that if Republicans lose control of either chamber in the midterm elections, he may introduce a fiscal consolidation plan during the Congressional "lame duck" session.

However, the uncertainty surrounding the political agenda makes it hard to predict the timing or effectiveness of such a promise, continuing to pose challenges for the bond market’s pricing of the U.S.’s medium- and long-term fiscal trajectory.