U.S. fiscal deficit for fiscal year 2026 approaches $2 trillion; interest costs exceed $1 trillion for the first time; debt burden may hit a record high.

Data released by the U.S. Treasury Department on Friday showed that the U.S. federal government's fiscal deficit for fiscal year 2026 expanded to nearly $2 trillion, remaining at this elevated level for a fourth consecutive year. As U.S. Treasury yields rise and government debt continues to swell, interest costs have hit a record high, further intensifying U.S. fiscal pressure. At the same time, the ratio of U.S. public debt to gross domestic product (GDP) is expected to break historical records in the coming years. The data showed that for fiscal year 2026, which ended September 30, the U.S. federal government's fiscal deficit reached $1.99 trillion, about 12% wider than the previous fiscal year's $1.78 trillion, marking the largest annual fiscal deficit since 2021. Total federal government spending rose about 6% year over year to $7.4 trillion, while fiscal revenue grew only about 3% to $5.4 trillion. As spending growth clearly outpaced revenue growth, the U.S. fiscal gap widened further. Measured against GDP, the U.S. fiscal deficit for fiscal year 2026 was about 6%. With the unemployment rate relatively low, a fiscal deficit of such magnitude is particularly noteworthy. The continued growth of U.S. government debt, combined with rising U.S. Treasury yields this year, has made interest costs a key factor driving the widening fiscal deficit. In fiscal year 2026, net interest costs of the U.S. federal government increased by $81.4 billion year over year to a record $1.05 trillion, making it one of the three largest government spending items. At the same time, spending on major U.S. social welfare programs also continued to rise. Among them, Social Security remained the federal government's largest spending item, rising by $86.4 billion year over year to $1.67 trillion in fiscal year 2026; Medicare spending increased by $76 billion to $1.07 trillion. It is worth noting that although official data showed the fiscal deficit narrowed in fiscal year 2025, that improvement was partly due to changes in accounting treatment. The 2025 Republican tax bill tightened restrictions related to student loans, prompting the U.S. Treasury Department to record it as a reduction in spending for that year, rather than its being driven entirely by an actual improvement in the fiscal position. U.S. Treasury Secretary Bessent previously listed tariff refunds as one of the important reasons for the widening fiscal deficit in fiscal year 2026. In February this year, the U.S. Supreme Court ruled that most of the tariff increases implemented during Trump's second term were invalid, requiring the government to refund some previously collected tariffs. The Trump administration is now seeking to rebuild the tariff system through other legal authorities. In addition, the large-scale tax cut bill introduced by the Trump administration in 2025 also had a clear impact on the fiscal revenue and expenditure for this fiscal year. Data showed that in fiscal year 2026, U.S. personal income tax revenue increased by $189 billion year over year, but corporate income tax revenue fell by more than $70 billion. The decline in corporate tax revenue was mainly due to the 2025 tax bill extending multiple tax cut measures and introducing new tax credit policies for businesses. In September alone, U.S. federal government spending exceeded revenue by $27 billion. A continuously widening fiscal deficit means the U.S. government needs to borrow further. The U.S. Congressional Budget Office (CBO) warned in February this year that, based on current fiscal trends, the ratio of U.S. public debt to GDP is expected to exceed the historical record of 106% set in 1946 by 2030. 1946 was shortly after the end of World War II, when the United States had accumulated enormous debt due to massive war spending. Today, the U.S. debt burden is at risk of once again breaking through that historical high. Total U.S. public debt has surpassed $40 trillion, setting a record high and further raising market concerns about the long-term fiscal sustainability of the United States. On how to improve the fiscal position, Bessent previously said the United States is expected to reverse the trend of continuously rising debt by accelerating economic growth, especially by leveraging productivity gains from the development of artificial intelligence (AI). However, several heads of international economic institutions and U.S. fiscal officials remain cautious about this. International Monetary Fund (IMF) Managing Director Georgieva said on October 14 that economic growth can certainly help improve the fiscal position, but growth alone cannot achieve the necessary fiscal adjustment quickly enough. David Zervos, a newly appointed adviser to Bessent, disputed this judgment, arguing that the IMF's past economic forecasts had shown significant deviations. On the same day, European Central Bank President and former IMF Managing Director Lagarde also said that countries facing large fiscal deficits need to take measures to address the problem. Phillip Swagel, director of the U.S. Congressional Budget Office, said on October 8 that the idea of stabilizing U.S. debt levels through economic growth alone is unrealistic. Facing an ever-increasing debt burden, Bessent has promised to propose a fiscal consolidation plan. If Republicans lose control of either the Senate or the House of Representatives in next month's midterm elections, Bessent may propose a fiscal consolidation plan during the transition period before the new Congress takes office. However, Trump has recently continued to propose new government spending plans, in sharp contrast to the goal of fiscal consolidation. Among them, Trump called for increasing U.S. defense spending by nearly $500 billion. In addition, he promised that if Republicans retain control of both the Senate and the House in the November 3 midterm elections, he will send a $5,000 check to every American. These potential spending commitments could further increase the U.S. government's future fiscal burden and make markets even more focused on whether the Trump administration can achieve fiscal discipline goals while promoting economic growth. As the U.S. fiscal deficit remains high for a prolonged period and debt interest costs continue to climb, whether the government can effectively control spending in the future and whether AI-driven economic growth can generate enough additional fiscal revenue will become important factors affecting the U.S. Treasury market and the long-term fiscal outlook.