Trillion dollar gap: US budget deficit swells to nearly $2 tn in fiscal 2026

US annual budget gap touches $2 trillion

The US government spent nearly $2 trillion more than it collected in the 2026 fiscal year, widening its budget deficit to the higest in five years. Higher debt payments, tariff refunds and increased spending on social benefits and defence contributed to the rise.The shortfall increased by $217 billion from the previous year, reaching $1.99 trillion, according to figures released by the treasury department on Friday.The deficit, recorded in the year to September 30, was the largest in five years and the third-largest annual shortfall on record. It was also the first full fiscal year of President Donald Trump's second term. The last time the US recorded a bigger deficit was in fiscal 2021, when the shortfall reached $2.77 trillion amid spending on Covid-19 pandemic relief measures.The latest figures show that although government revenue rose to a record, expenditure grew considerably faster. Receipts increased by $169 billion, or 3%, to $5.40 trillion in fiscal 2026 from $5.24 trillion a year earlier. Outlays, meanwhile, rose by $386 billion, or 6%, to an unprecedented $7.40 trillion, compared with $7.01 trillion in fiscal 2025.The resulting gap was wider than the $1.78 trillion deficit recorded in the previous fiscal year.

Interest burden grows alongside US debt

The cost of servicing the government's debt continued to weigh on public finances, with debt-service expenditure reaching a record $1.36 trillion. The amount was $144 billion, or 12%, higher than in the previous fiscal year.Debt servicing is now the government's third-largest spending category, surpassed only by Social Security and the combined expenditure on Medicare and Medicaid. The increase comes after total US debt crossed $40 trillion about two months ago.Rising expenditure on social benefit programmes, including Social Security and Medicare, also contributed to the higher deficit. Defence spending recorded another substantial increase, rising by 6% to $917 billion during the fiscal year, up $48 billion.A treasury official told Reuters that the department could not determine how much of the increase in defence expenditure was linked to the war Trump and Israel started against Iran earlier this year.

Supreme Court ruling leads to $145 billion in tariff refunds

The government's tariff collections took a hit after a Supreme Court ruling this year invalidated a large portion of the tariffs imposed by Trump during his first year in office.The ruling led to $145 billion in tariff refunds during fiscal 2026. Net tariff receipts consequently fell by $22 billion, with net tariff income declining 11% to approximately $173 billion. The reduction in collections was another factor behind the widening budget gap.The treasury department estimated the deficit at 6.2% of GDP for fiscal 2026. This was higher than the actual deficit-to-GDP ratio of 5.8% recorded in fiscal 2025. A Treasury official, however, declined to specify the GDP estimate used to calculate the latest ratio.The final month of the fiscal year also ended in deficit. The US government recorded a $27 billion shortfall in September, compared with a surplus of $198 billion in the same month a year earlier.