U.S. budget deficit soars to nearly $2 trillion, exceeding 6% of GDP; high interest rates and tax cuts further worsen the deficit

According to data from the U.S. Congressional Budget Office (CBO), for the fiscal year 2026 ending September 30, the U.S. federal budget deficit rose to $1.993 trillion, a year-on-year increase of 12%, reaching the highest level since 2021. Meanwhile, federal spending reached $7.4 trillion, up 6%; fiscal revenue was $5.4 trillion, an increase of only 3%.

According to the latest report from The Wall Street Journal, the U.S. deficit as a percentage of GDP is expected to exceed 6%, up from 5.8% in fiscal year 2025. Historically, such levels usually occur only during recessions or wartime, yet the U.S. economy has been in an expansion cycle for over six years.

With only a few weeks left before the midterm elections, neither party has made deficit reduction a core campaign issue, and some policy proposals may even further increase the deficit.

Interest Payments Become the Biggest Variable

The primary force driving the expanding deficit comes from the sharp rise in debt interest costs.

According to CBO data, U.S. net interest payments in fiscal year 2026 exceed $1.1 trillion, an increase of $11.5 billion year-on-year, or 11%. This single increase accounts for more than half of the deficit growth for the year.

U.S. interest payments have already surpassed defense spending as well as Medicare expenditures, accounting for more than one-fifth of all tax revenue.

It is worth noting that the recent sharp rise in U.S. Treasury yields—10-year Treasury yields once hit a 24-year high—has not yet fully impacted the budget. Since interest rate changes only affect new debt issuance, and refinancing of maturing debt takes time, interest pressure will continue to rise in the coming years.

Double Miscalculations in Tax Cuts and Tariff Revenue

The Trump administration and the Republican-controlled Congress took a series of deficit reduction measures in 2025, including shrinking the size of the federal workforce, cutting clean energy tax incentives, letting some medical subsidies expire, and reducing the scale of food stamp distributions.

However, both key expectations fell flat.

First, Trump hoped for a sharp increase in tariff revenue, but the Supreme Court ruled that he had overstepped his authority, forcing the government to issue refunds, resulting in net tariff revenue falling below 2025 levels.

Second, the "Big Beautiful Bill" passed by Republicans last year produced new tax cut effects. Corporate income tax revenue fell by $70 billion, a 16% drop—partly due to Congress granting retrospective R&D tax breaks and expanding accelerated depreciation deductions for plants and equipment (including data center servers).

Meanwhile, Republicans also increased immigration enforcement spending and extended expiring tax cuts, further driving up the deficit.

Former CBO Director and current head of the conservative think tank American Action Forum, Douglas Holtz-Eakin, stated: "They could have made things worse, and some of them actually wanted to. They've made no substantive progress, and we're just drifting aimlessly forward."

Debt Approaching Historic Limits

Persistent annual deficits are rapidly accumulating into massive public debt.

Currently, U.S. federal debt held by the public has exceeded 100% of GDP and is approaching post-WWII historic highs.

Shai Akabas, Vice President of Economic Policy at the Bipartisan Policy Center, stated: "Running a $2 trillion deficit annually under conditions of economic growth, low unemployment, and no major emergencies is an unsustainable trajectory." "That’s not something you should be doing when things are relatively calm."

Social Security and Medicare are the two largest federal spending items, both growing faster than the overall budget as the population ages. They enjoy high support among voters, making them politically difficult to cut.

Partisan Disputes Lead to Divergent Reform Paths

Facing the deficit figures, both parties have expressed concern, but their proposed solutions are completely opposed.

Senate Budget Committee Chairman and Republican Senator Ron Johnson stated bluntly: "I've been sounding the alarm to my colleagues, but I'm clearly being ignored." "This is out-of-control spending, and we simply refuse to cut it to a reasonable level."

Treasury Secretary Scott Bessent stated he would release a "fiscal consolidation" plan aiming to reduce the deficit to 3% of GDP. However, Trump simultaneously promised to issue $5,000 checks to every adult American (total cost over $1 trillion) and plans to dramatically increase military spending, clearly stating he will not cut Social Security or Medicare commitments.

On the Democratic side, Corey Husak, Tax Policy Director at the left-leaning Center for American Progress, stated: "What the government is unwilling to pursue is mainly tax evasion by the wealthy, which has created a culture of impunity."

Brendan Boyle, possible future chairman of the House Budget Committee and Democratic Representative, commented: "Though Republicans are entirely hypocritical on the debt issue, that doesn't make the problem of massive deficits any less real." "Any serious proposal must ultimately require billionaires to bear more of the burden."

The Road Ahead Depends on Election Results

According to The Wall Street Journal, fiscal data for 2026 have begun reflecting the impact of some Republican legislation from last year, but other changes—including cuts to Medicaid spending—have not yet taken effect.

In addition, last year's law altered student loan repayment rules, resulting in a one-time accounting for $131 billion in spending cuts in fiscal year 2025, creating some technical distortion in the comparison between the two fiscal years.

The future fiscal trajectory will largely depend on the outcome of the midterm elections. Analysts point out that divided government sometimes leads to bipartisan fiscal constraint agreements, but it can also result in both sides supporting plans to increase their respective deficits.