FILE PHOTO: The US budget deficit rose to $1.99 trillion in fiscal 2026, with debt servicing costs reaching a record $1.36 trillion. | Photo Credit: Ken Cedeno

The US budget deficit rose by $217 billion to nearly $2 trillion in the 2026 fiscal year, fuelled in part by tariff refunds and record spending to service the nation’s more than $40 trillion in debt, marking the largest budget shortfall in five years, Treasury Department figures showed on Friday.

Continued increases in spending for social benefits programmes like Social Security and Medicare and a $48 billion jump in defence spending also factored into the increase.

Deficit reaches $1.99 trillion

The $1.99 trillion deficit for the year ended September 30, the first full budget year of President Donald Trump’s second term, was up from $1.78 trillion in fiscal 2025. It was the largest shortfall since fiscal 2021’s $2.77 trillion budget gap, then fuelled by COVID-19 pandemic relief spending, and is the third-largest annual deficit ever.

Total receipts for fiscal 2026 were a record $5.40 trillion, up $169 billion, or 3 per cent, from the $5.24 trillion in fiscal 2025.

Fiscal 2026 outlays also were a record at $7.40 trillion, up $386 billion, or 6 per cent, from the $7.01 trillion in the prior fiscal year.

Debt servicing costs hit record $1.36 trillion

Debt-service outlays totalled a record $1.36 trillion, climbing by $144 billion, or 12 per cent, a spending category now eclipsed only by Social Security and the combined outlays for Medicare and Medicaid. Total US debt breached the $40 trillion milestone about two months ago.

Tariff refunds add to deficit

Another driver of the widening shortfall was a $22 billion drop in net tariff receipts following a Supreme Court ruling this year negating a large portion of the tariffs Trump had imposed during his first year in office. That triggered $145 billion of tariff refunds over this year, resulting in an 11 per cent decline in net tariff income to about $173 billion.

Defence spending rises 6 per cent

Defence spending for the year rose by 6 per cent to $917 billion. A US Treasury official said it was not clear how much of the increase could be attributed to the war Trump and Israel started against Iran earlier this year.

Deficit-to-GDP ratio rises to 6.2 per cent

The Treasury official said the department calculated an estimated deficit-to-GDP ratio of 6.2 per cent for fiscal 2026, but declined to say what GDP estimate was used. This figure compares to an actual 5.8 per cent deficit-to-GDP ratio for fiscal 2025.

For the 2026 fiscal year’s final month of September, the Treasury reported a deficit of $27 billion versus a $198 billion surplus a year earlier.

Published on October 17, 2026