On October 16, local time, the U.S. Department of the Treasury released the latest data. The federal fiscal deficit reached US$1.99 trillion in fiscal year 2026, an increase of US$217 billion from the previous fiscal year and the highest level in five years. This figure even exceeds the annual economic output of some developed countries.
While U.S. government revenue hit a record $5.4 trillion for the full year, spending grew even faster, to $7.4 trillion. Among them, debt interest expenses amounted to US$1.36 trillion.
With the total federal debt exceeding $40 trillion, why the U.S. finances continue to be unable to make ends meet has become a common concern among the outside world.
Fiscal deficit approaches $2 trillion
The proportion of revenue has nearly doubled in ten years
Data from the U.S. Department of the Treasury show that the federal fiscal deficit in fiscal year 2026 increased by about 12% compared with the previous fiscal year. This is the largest annual fiscal deficit in the United States since 2021 and the third-highest annual deficit in history.
What does nearly $2 trillion mean?
Taking the economic scale of other countries as a reference, Australia's annual GDP in 2025 will be approximately 1.84 trillion U.S. dollars, and Spain's will be approximately 1.9 trillion U.S. dollars. The U.S. federal government's annual fiscal revenue and expenditure gap has exceeded the annual economic aggregates of these two developed economies.
Looking at historical changes, in fiscal year 2016, the U.S. federal fiscal deficit was approximately US$587 billion, equivalent to 18% of that year's fiscal revenue; by fiscal year 2026, the deficit expanded to nearly US$2 trillion, equivalent to 37% of annual fiscal revenue. In the past ten years, the fiscal deficit has roughly doubled as a proportion of revenue, rising from 18% to 37%.
Where did the money go?
Pensions, health care and debt interest account for the bulk
U.S. fiscal expenditures are mainly concentrated in areas such as social security, medical care, national defense, and debt interest. Among them, pensions and medical security account for a considerable proportion.
According to data from the U.S. Congressional Budget Office, in fiscal year 2025, the federal government’s social security pension expenditures were approximately US$1.58 trillion, equivalent to 30% of that year’s fiscal revenue; including Medicare, Medicaid and other medical security projects, the total expenditures on pensions and medical security were approximately US$3.4 trillion, equivalent to approximately 65% of federal fiscal revenue.
Historical comparisons better illustrate this change. In fiscal year 2016, pension and major medical security expenditures together accounted for about 57% of fiscal revenue; by fiscal year 2025, this proportion has risen to about 65%. In the past ten years, the proportion of related expenditures in fiscal revenue has increased by about 8 percentage points. Population aging and rising health care costs are important drivers of these long-term increases in spending.
To measure a country's fiscal deficit, the commonly used indicator internationally is the ratio of deficit to gross domestic product. EU fiscal rules in principle require member states to control this ratio within 3%. In 2025, France's deficit will be 5.1% of its GDP, Germany's deficit will be approximately 2.5% of its GDP, and the United States' deficit in fiscal year 2026 has reached 6.2% of its GDP. Although the statistical scope of U.S. federal finance and Europe's overall government finance are different, these figures can still be used as a reference for scale.
Why does the U.S. government’s deficit expand as its revenue increases? Data from the U.S. Department of the Treasury show that federal government revenue increased by 3% this year to $5.4 trillion; expenditures increased by 6% to $7.4 trillion. Both revenue and spending hit record levels, but spending grew significantly faster than revenue.
The U.S. financial media "MarketWatch" pointed out that although the fiscal gap continues to expand, as the mid-term elections approach, the government's space to promote major fiscal adjustments in the short term is still limited.
Meanwhile, debt interest is becoming another heavy burden.
Data from the U.S. Department of the Treasury show that total debt interest payments in fiscal year 2026 reached $1.36 trillion, a year-on-year increase of 12%, setting another record high and equivalent to about a quarter of that year’s fiscal revenue. On average, the U.S. government pays about $3.7 billion in interest every day. This expenditure alone exceeds the federal government's annual defense expenditure.
The larger the debt, the more interest the government usually has to pay. The total U.S. federal debt has exceeded $40 trillion. The government not only needs to borrow to fill new fiscal gaps, but also continues to raise funds for maturing debt. When borrowing rates are high, the interest burden increases.
In terms of fiscal revenue, there are also special changes this year. The U.S. Supreme Court ruled that some tariff measures were invalid, and the federal government therefore refunded approximately $145 billion in tariffs, affecting annual fiscal revenue.
It can be seen that the continued expansion of the U.S. fiscal deficit is the result of the growth of pension and medical security expenditures, rising debt interest rates, and changes in some fiscal revenues.
Fiscal pressure continues
What are the long-term challenges facing the U.S. economy?
The expanding fiscal deficit first means that the U.S. government needs to bear greater pressure on borrowing and debt repayment.
Projects such as pensions and medical care involve the vital interests of a large number of people and are difficult to significantly reduce in the short term; debt interest must be paid on schedule. This makes the government face more restrictions when arranging budgets in areas such as infrastructure, education, and scientific research.
The U.S. Congressional Budget Office predicted in February this year that if current laws and policies are generally continued, the U.S. annual fiscal deficit may reach $3.1 trillion by fiscal year 2036, and the scale of federal debt held by the public may be equivalent to 120% of the U.S. annual economic aggregate.
The International Monetary Fund (IMF) has issued a warning about the fiscal situation of the United States. IMF President Georgieva said on October 14 that the United States cannot rely solely on economic growth to reduce its debt burden, but also needs to take measures from both taxation and government spending.
The impact of U.S. fiscal problems is not limited to the country. U.S. Treasury bonds are an important asset in global financial markets and are widely held by central banks, financial institutions and investors around the world. If the U.S. government maintains a huge deficit for a long time, it will need to continue to raise funds through the issuance of Treasury bonds. Its financing costs and changes in the Treasury market may also affect global capital flows and the borrowing costs of other countries.
Although the United States has a large economy and a developed capital market, the U.S. dollar and U.S. Treasury bonds still occupy an important position in the global financial system. A huge fiscal deficit may not trigger a debt crisis in the short term, but long-term and sustained fiscal imbalances may still push up government financing costs, squeeze public spending space, and have an adverse impact on U.S. economic growth and financial market stability.
As the November 3 midterm elections approach, fiscal policy will also continue to receive attention. How the United States will strike a balance between ensuring public expenditures such as pensions and medical care, controlling debt growth, and maintaining economic development in the future remains a long-term problem.
