US Deficit Hits $1.99 Trillion, Largest in Five Years

WASHINGTON. The United States closed fiscal 2026 with a budget deficit of $1.99 trillion, the Treasury Department said on Friday, October 16. The gap rose by $217 billion from fiscal 2025. It is the largest shortfall in five years and the third largest annual deficit on record.

The fiscal year ended on September 30, 2026. It was the first full budget year of President Donald Trump's second term. Only the pandemic year of fiscal 2021, with a $2.77 trillion gap, and fiscal 2020 rank above it in dollar terms.

Record money in, record money out

Total receipts reached a record $5.40 trillion, up $169 billion, or 3 percent, from $5.24 trillion in fiscal 2025. Spending also set a record. Outlays were $7.40 trillion, up $386 billion, or 6 percent, from $7.01 trillion a year earlier.

The single fastest growing bill was the cost of the debt itself. Debt service outlays hit a record $1.36 trillion, up $144 billion, or 12 percent. Reuters reported that this category is now passed only by Social Security and by Medicare and Medicaid combined. Total United States debt passed $40 trillion about two months ago. AFP put the debt load at $40.3 trillion in its report on the same figures.

Defense spending rose 6 percent to $917 billion. A Treasury official said it was not clear how much of that increase came from the war against Iran that the United States and Israel started earlier this year. Social benefit programs such as Social Security and Medicare also cost more.

Tariff refunds cut the other way

Tariffs were supposed to narrow the gap. Instead, refunds widened it. A Supreme Court ruling in February 2026 struck down a large part of the tariffs imposed in the first year of the term. The ruling set off $145 billion in tariff refunds during the year.

Net tariff income fell by $22 billion, a drop of 11 percent, to about $173 billion. The Congressional Budget Office had projected a $1.9 trillion deficit for fiscal 2026 in February. By July it expected revenues to land about $200 billion below its February view, mostly because tariff collections came in smaller than expected after the court ruling.

Why it matters

A deficit of this size has to be borrowed. The Treasury estimated the deficit at 6.2 percent of gross domestic product for fiscal 2026, up from an actual 5.8 percent in fiscal 2025. The official declined to say which GDP estimate the department used.

Borrowing costs set the price of that debt. Treasury yields shape mortgage rates and car loan rates across the country, and yields have climbed this year. Each refinancing of older, cheaper debt at higher rates adds to the interest bill that is already the budget's fastest growing line.

September alone showed the swing. The government ran a $27 billion deficit in the final month of fiscal 2026. A year earlier, September had closed with a $198 billion surplus.

What happens next

Fiscal 2027 is already under way. The new year starts with the same structure that produced this result: record benefit and defense spending, an interest bill above $1.3 trillion, and tariff income reduced by court ordered refunds. Closing the gap would take either slower spending, higher receipts, or lower borrowing costs. None of the three is in the latest figures.