The federal government’s budget deficit totaled $2 trillion in fiscal year 2026, driven by a sharp increase in the cost of servicing the nation’s national debt, which now exceeds $40 trillion.
Data released Thursday by the nonpartisan Congressional Budget Office (CBO) indicates the deficit rose to $1.993 trillion in fiscal 2026, which concluded at the end of September.
That figure represents a $218 billion increase over the $1.775 trillion deficit recorded in fiscal 2025, amounting to a 12% year-over-year rise.
Although federal tax receipts increased 3% to more than $5.4 trillion during fiscal 2026, that revenue growth was outpaced by a 6% increase in federal spending, which reached nearly $7.4 trillion in the CBO’s preliminary data.
The budget category with the largest spending increase was net interest expenses on the national debt, which climbed $115 billion, or 11%, from the previous year. The CBO cited a larger national debt compared to fiscal 2025 and higher long-term interest rates as the primary drivers.
Spending on Social Security benefits also rose $86 billion, or 5%, fueled by increases in average benefits and beneficiary numbers. The CBO noted the increase would have been more pronounced absent a significant set of one-time retroactive payments issued under the Social Security Fairness Act.
Medicare spending increased $77 billion, or 8%, due to higher enrollment and payment rates, while Medicaid spending also rose $55 billion, or 8%, driven by escalating costs per enrollee.
The federal budget deficit hit $2 trillion in fiscal year 2026, the CBO said. (Kevin Carter/Getty Images)
Spending by the Department of Defense on military activities was $48 billion, or 5%, higher than in fiscal 2025, with the largest increases directed toward research and development and military personnel.
Department of Education spending rose $41 billion, or 117%, largely driven by differences in the amounts recorded for the estimated costs of outstanding student loans. A reduction of $131 billion was recorded in September 2025 because of program modifications in the One Big Beautiful Bill Act (OBBBA), and the 2026 modification was significantly smaller, resulting in a year-over-year increase.
The largest increases in tax revenue came from individual income and payroll taxes, which rose $255 billion, or 6%, from the prior year. Amounts withheld from workers’ paychecks rose $168 billion, or 5%, while non-withheld payments rose $108 billion, or 9%.
That was partially offset by higher individual income tax refunds, which grew by $16 billion, or 5%, in the latest fiscal year due to provisions in the OBBBA.
Tax receipts from corporate income taxes decreased by $70 billion, or 16%, because of larger deductions for certain investments in the OBBBA which reduced some payments and offset the increases in receipts that otherwise would’ve been expected.
Collections of customs duties, including tariffs, fell by $22 billion, or 11%, in fiscal year 2026 compared with the prior year. The CBO noted that larger amounts were collected early in fiscal year 2026, but started to decline in May when the Trump administration began issuing refunds after the Supreme Court struck down the IEEPA tariffs.
Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, said in a statement that the fiscal year 2026 deficit “ranks among the highest deficits in our history – and the highest ever outside of a war or recession.”
“A new fiscal year means an opportunity for change, and though it is not always easy, it is necessary,” MacGuineas added. “Policymakers can start by adopting an attainable goal – such as bringing deficits down to 3% of the economy, or about half of where they are today – and commit to achieving it, which can be done through a bipartisan fiscal commission that examines all areas of the budget.”