Dubai Telegraph - US budget deficit grows to nearly $2 trillion, highest since 2021

The expansion comes amid growing worries over the massive $40.3 trillion US debt load and rising inflation, as the cost of borrowing climbs.

Refunds of Trump's tariffs after they were overturned have further fueled the budget gap.

The federal deficit, which occurs when government spending exceeds its revenues, rose to $1.99 trillion in fiscal year 2026, the Treasury Department said.

This marked a 12-percent increase from the prior year, when the shortfall came in at $1.78 trillion.

A key driver of expenditures was the rising interest paid on public debt, which jumped $144 billion to a record $1.36 trillion.

Interest costs on around $32 trillion in publicly held US debt have been ballooning in recent years, and climbing bond yields have sparked further concerns.

Treasury bond yields, which influence interest rates for mortgages and auto loans, have jumped this year, with steeper borrowing costs adding to pressures that US voters face ahead of November's midterm elections.

Meanwhile, an expected influx of revenue from Trump's sweeping tariffs have failed to fully materialize during his second term.

The Supreme Court struck down his global duties in February, triggering a wave of refunds.

Treasury data released Friday reflected $145 billion in customs refunds over the year -- primarily due to tariffs -- erasing significant gains from Trump's duties.

Overall, government revenues climbed by three percent to $5.40 trillion in the latest fiscal year, which ended September 30.

But spending was much higher, rising by six percent to $7.40 trillion.

- War risks -

The deficit will likely be similar for the next year, said Nancy Vanden Houten of Oxford Economics.

But she warned "the risk may be for a larger budget gap if the war with Iran persists well into the fiscal year."

The Trump administration has pledged to cut deficits and government spending since he returned to the White House last year.

Besides slashing the federal workforce and foreign aid, the Republican-controlled Congress pushed through cuts to the Medicaid health insurance scheme and moved to shrink the federal food assistance program too.

But they also extended expiring tax cuts and provided fresh funding for Trump's migrant deportation drive.

The latest data released Friday showed that upticks in tax collection from individuals and customs revenues were offset by higher refunds and lower corporate tax collection.

Among other sectors, spending on defense military programs increased by $48 billion, or six percent, over the year to $917 billion.

Taken together, a Treasury official estimates the US deficit-to-GDP ratio is around 6.2 percent, up from 5.8 percent last year.

This stands in contrast to Treasury Secretary Scott Bessent's previously stated goal of bringing the deficit down to three percent of GDP, alongside other targets like spurring economic growth of three percent.

The latest budget figures come less than three weeks before US midterm elections, where Trump's Republican party is fighting to retain control of Congress.

Ahead of the crucial vote, both Republicans and Democrats have raised ideas that could widen the budget shortfall further.

Trump recently promised $5,000 to every American adult if Republicans maintained control of Congress, a plan that would cost over $1 trillion.

Democrats say they are looking to reverse Medicaid cuts and revive health care tax breaks.

F.Chaudhary--DT