Trump administration runs third-largest federal budget deficit in history

You can add spending cuts, DOGE, and fixing the budget with tariffs to the mountain of broken promises dominating the Washington, D.C. skyline.

The Trump administration just ran the biggest budget deficit in five years.

The final fiscal 2026 budget shortfall came in at $1.99 trillion. That was 12 percent higher than last year’s $1.78 trillion budget deficit.

It was the third-highest budget deficit in history. The only higher shortfalls came in 2020 and 2021 when the government shut down the economy for a virus and showered the citizenry with stimulus.

Keep in mind that the federal government ran $1 trillion deficits for the first time during the Obama administration, during the Great Recession. Today, we’re seeing $2 trillion deficits, even with the economy supposedly expanding.

It’s a spending problem

Democrats like to blame deficits on tax cuts, and the CBO estimates corporate taxes were 16 percent lower thanks to cuts in the "Big Beautiful Bill that "offset the increases in those receipts that otherwise would have been expected, given the rise in corporate income." (One might argue that the rise in corporate income was a function of those tax cuts.)

However, with this decline in potential revenues, Uncle Sam still had a pretty good year in 2026. The government collected $5.4 trillion in revenue. That was a 3.22 percent increase over the previous year.

In fact, the federal government has enjoyed strong revenue growth for three straight years. Receipts in 2025 were 6 percent higher than 2024, an 11-percent increase over 2023.

Tariff revenue helped boost overall receipts. The federal government collected $317.8 billion in import duties. However, it had to refund $144.6 billion after the Supreme Court ruled Trump’s unilateral tariffs unconstitutional.

The problem is on the spending side of the ledger.

The Trump administration blew through nearly $7.4 trillion in fiscal 2026. To put that into context, that's roughly $20.3 billion per day.

Spending was up 5.5 percent over the prior year.

A 5.5 percent increase in spending might not sound significant. But weren't we told there would be spending cuts?

In fact, the Big Beautiful Bill featured some spending cuts (along with spending increases).

Overall federal spending surged despite cuts to the EPA, the Department of Education, and USAID, along with staffing reductions throughout the federal government. Lower disaster spending also helped moderate spending levels through the first two months of fiscal ’26.

And now there's a war.

This is par for the course.

You might recall that President Biden promised the [pretend] spending cuts would save “hundreds of billions” with the debt ceiling deal (aka the [misnamed] Fiscal Responsibility Act).

That never happened.

Despite some non-specific talk about “spending cuts,” there seems to be little to no commitment to tackle runaway spending. In fact, the powers-that-be constantly find new reasons to spend money, whether it is a crisis at home or a war overseas.

The cost of the debt

As the government borrows more to cover the budget shortfall, the cost of servicing the debt climbs in this higher-interest rate environment.

Interest expense has grown into the second-largest spending category in the federal budget behind only Social Security.

The Treasury forked out $1.36 trillion in interest payments alone in fiscal 2026. That was an 11.5 percent increase over last year.

Net interest (interest expense – interest receipts) was $1.1trillion.

In fiscal 2026, the federal government spent more on interest on the debt than it did on national defense ($965 billion) or Medicare ($1.1 trillion). The only higher spending category is Social Security ($1.7 trillion).

Much of the debt currently on the books was financed at very low rates before the Federal Reserve started its hiking cycle. Every month, some of that super-low-yielding paper matures and must be replaced with bonds yielding much higher rates. Meanwhile, Treasury yields are spiking as more countries spurn the dollar.

When people say the spending is unsustainable, it feels like an understatement. In fact, it’s fair to call the federal government insolvent.

However, very few people in the political class seem the least bit interested in tackling the problem. The bad news is that at some point, the problem will tackle them.

Who cares about deficits?

Stories about budget deficits and the ever-growing national debt tend to elicit gasps of shock followed by shrugs. Nobody really seems to care.

In fact, a lot of people act like massive budget deficits don’t matter. However, as the Bipartisan Policy Center pointed out after last year’s big budget shortfall, the growing national debt and the mounting fiscal irresponsibility undermine the dollar.

“Confidence in U.S. creditworthiness may be undermined by a rapidly deteriorating fiscal situation, an increasing concern with federal debt set to grow substantially in the coming years.”

This could lead to slower economic growth, higher unemployment, and less investment wealth.

A lack of confidence in the U.S. fiscal situation could also reduce demand for U.S. debt. This would force Treasury yields even higher to attract investors.

We’re seeing that today with yields at levels not seen since 2001.

It’s easy to frame this as a “Trump problem” because he’s the guy in office right now. However, fiscal malfeasance is a bipartisan sport. Every president since Calvin Coolidge has left the U.S. with a bigger national debt than when he took office.

The bottom line is the U.S. government has a spending problem it won’t address. No matter what the politicians in D.C. claim, there is no way to fix the budget problem by shoveling more money into the hole with tariffs, much less replacing the IRS.

The rest of the world is paying attention.