US Budget Deficit Nears 2 Trillion Dollars as Net Interest Tops 1 Trillion Dollars

By The Edge Research Team

The US Treasury Department reported on Friday, 11 September, that the federal budget deficit had approached 2 trillion dollars in the first 11 months of fiscal year 2026, after the government added roughly 168 billion dollars to the shortfall in August.

The Treasury’s Monthly Treasury Statement put the October to August deficit at 1.966 trillion dollars, leaving it only about 34 billion dollars below the 2 trillion dollar threshold with one month of the fiscal year remaining.

At first sight, the result looks slightly better than last year. But once calendar related shifts in federal payments are removed, the Congressional Budget Office estimates that the underlying deficit has actually widened by about 82 billion dollars. At the same time, net interest costs have risen above 1 trillion dollars, making financing costs one of the clearest sources of pressure in the budget.

The headline improvement is largely a calendar effect

Federal receipts reached about 4.846 trillion dollars during the first 11 months of fiscal 2026, up 154.5 billion dollars, or 3.3 percent, from a year earlier.

Outlays reached about 6.811 trillion dollars, up 146.8 billion dollars, or 2.2 percent.

On the unadjusted Treasury figures, that left the deficit 7.7 billion dollars smaller than during the same 11 months of fiscal 2025.

But the year on year comparison is distorted by the calendar.

Certain federal payments that would normally have fallen on 1 September 2025 were made in August because Labor Day fell on that date. Those early payments inflated August 2025 spending and therefore make the current year’s unadjusted comparison appear better.

The Congressional Budget Office estimates that, after removing the effect of those timing shifts, the deficit for the first 11 months of fiscal 2025 would have been about 1.885 trillion dollars. On the same basis, the fiscal 2026 shortfall is roughly 82 billion dollars larger, an increase of about 4 percent.

Adjusted outlays are likewise about 235 billion dollars, or 4 percent, above a year earlier rather than the 2 percent shown by the raw comparison.

Receipts covered about 71.1 percent of federal outlays during the period, leaving the equivalent of roughly 28.9 cents of every dollar of spending financed by the deficit.

Net interest has crossed 1 trillion dollars

The most important change inside the expenditure accounts is interest.

The Congressional Budget Office puts net interest on the public debt at 1.052 trillion dollars for October through August, an increase of 111 billion dollars, or 12 percent, from the same period of fiscal 2025.

That is far faster than the increase in overall federal spending.

Net interest alone was equivalent to about 53.5 percent of the entire 1.966 trillion dollar deficit on our calculation.

It also exceeded the 833 billion dollars spent by the Department of Defense on military programmes during the same period by roughly 219 billion dollars.

The Congressional Budget Office attributes the increase to a larger outstanding debt stock and higher long term interest rates, although lower short term rates provided some offset.

The Treasury’s broader gross interest line reached about 1.267 trillion dollars over the 11 months, up approximately 143 billion dollars, or 12.7 percent, from a year earlier.

On that gross measure, interest accounted for about 18.6 percent of all federal outlays and was equivalent to more than one quarter of receipts.

Changes follow the Congressional Budget Office’s adjusted comparison, which removes the effect of payments shifted between months by holidays and weekends. Medicare is net of offsetting receipts.

Net interest, Social Security, Medicare and Medicaid together totalled about 4.197 trillion dollars during the 11 months.

That sum was equivalent to 86.6 percent of all federal receipts, up from about 84.1 percent during the comparable period a year earlier on our calculation.

The comparison illustrates how rapidly the large mandatory programmes and financing costs are expanding relative to the federal revenue base.

Education spending fell for accounting reasons

One of the largest apparent spending reductions came at the Department of Education, where outlays declined by 79 billion dollars, or 56 percent.

But much of that drop does not represent an equivalent cash saving.

The Congressional Budget Office says the decline largely reflects a 53 billion dollar downward revision recorded in June to the estimated cost of outstanding student loans. It is therefore substantially an accounting revaluation rather than a comparable reduction in current programme expenditure.

That distinction matters because the reduction helps suppress the headline growth rate for total federal outlays even as several of the largest recurring spending categories continue to rise.

Tariff collections were heavily offset by refunds

The revenue side also contains an unusually large distortion.

Treasury figures show gross customs collections of about 292.5 billion dollars during the first 11 months of the fiscal year, compared with approximately 171.9 billion dollars a year earlier.

But customs refunds surged to about 125.2 billion dollars from only 6.7 billion dollars.

That left net customs receipts at approximately 167.3 billion dollars, only about 1 percent above a year earlier despite the much larger gross collection.

Refunds were therefore equivalent to around 43 percent of gross customs receipts.

The change followed the Supreme Court’s February decision on tariffs imposed under the International Emergency Economic Powers Act. The Congressional Budget Office estimates that roughly 110 billion dollars of refunds related to those duties had been issued through August.

The result is an important distinction between tariffs collected at the border and the amount ultimately retained by the federal government.

Income taxes carried revenue growth

Individual income tax receipts rose 189 billion dollars to about 2.547 trillion dollars over the period, while payroll tax receipts increased 50 billion dollars to about 1.664 trillion dollars.

Together, those two categories generated an additional 239 billion dollars of revenue.

Corporate income tax receipts moved sharply in the opposite direction, falling 96 billion dollars, or 25 percent, to about 294 billion dollars.

The Congressional Budget Office attributes part of that decline to provisions in the 2025 reconciliation legislation that allow corporations to take larger deductions for certain investments.

The federal revenue increase is therefore being driven principally by taxes on household earnings and payrolls rather than by corporate taxes or the net proceeds from the higher tariff collections.

Why it matters: The debt stock itself is not the new information in the August release. The new signal is how that debt is feeding through into the federal budget. On the unadjusted figures, the 11 month deficit is slightly smaller than it was last year. After correcting for the timing of federal payments, it is about 82 billion dollars larger. At the same time, net interest has risen 12 percent to more than 1 trillion dollars and now equals more than half of the entire year to date deficit on our calculation. That makes interest increasingly difficult to separate from the broader fiscal imbalance. Unlike a new discretionary programme, much of the increase arrives automatically as outstanding debt is refinanced and the cost of servicing the existing stock changes. Revenue is still growing, led by individual income and payroll taxes, but that growth is being absorbed by rising interest and mandatory spending. The fiscal picture is therefore weaker beneath the headline than the small year on year decline in the unadjusted deficit suggests.

Outlook: September is the final month of fiscal year 2026, and the Treasury’s annual result will follow in October. The 1.966 trillion dollar deficit already recorded through August is about 66 billion dollars larger than the 1.9 trillion dollar full year deficit projected in the Congressional Budget Office’s February baseline. That does not necessarily mean the annual deficit will exceed the projection because September is normally a strong month for federal receipts, including quarterly estimated tax payments. September 2025 produced a surplus of about 198 billion dollars. A repeat of that result would reduce the fiscal 2026 deficit to roughly 1.77 trillion dollars on our calculation. Whether that happens will depend heavily on September tax collections. Corporate income tax receipts are already down 25 percent over the first 11 months, while tariff refunds continue to reduce customs revenue. Interest will be the other number to watch. Net interest has averaged roughly 95.6 billion dollars a month so far this fiscal year. If that pace were simply maintained in September, the full year bill would approach 1.15 trillion dollars. The final annual statement will therefore answer two questions: whether September’s normal revenue strength is sufficient to pull the deficit materially back below 2 trillion dollars, and how far the annual net interest bill has moved beyond the 1 trillion dollar threshold.

Sources: US Department of the Treasury, Congressional Budget Office.

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