US annual budget gap hits nearly $2 trillion, largest in 5 years

The US budget deficit rose by $217 billion to nearly $2 trillion in the 2026 fiscal year, fueled 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 programs like Social Security and Medicare and a $48 billion jump in defense spending also factored ‌into the increase.

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 fueled 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%, from the $5.24 trillion in fiscal ⁠2025. Fiscal ​2026 outlays also were a ⁠record at $7.40 trillion, up $386 billion, or 6%, from the $7.01 trillion in the prior fiscal year.

Debt-service outlays totaled a record $1.36 trillion, climbing by $144 billion, or 12%, 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. 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% decline in net tariff income to about $173 billion.

Defense spending for the year rose by 6% 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. The Treasury official said the department calculated an estimated deficit-to-GDP ratio ⁠of 6.2% for fiscal ⁠2026, but declined to say what GDP estimate was used. This figure compares to an actual 5.8% 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.