US budget deficit nears $2 trn as tariff refunds rise; debt crosses $40 trn

The US federal budget deficit rose to nearly $2 trillion in fiscal year 2026, reaching its highest level since 2021 despite President Donald Trump's promises to reduce government spending and the national debt.

According to data released by the US Treasury Department on Friday, the deficit increased 12 per cent to $1.99 trillion, up from $1.78 trillion in the previous fiscal year. The widening gap comes as the country grapples with a national debt of around $40.3 trillion and rising borrowing costs.

Rising debt interest adds to spending

Interest payments on public debt were a major contributor to the increase, climbing by $144 billion to a record $1.36 trillion. The cost of servicing publicly held US debt, which stands at around $32 trillion, has risen in recent years amid higher borrowing costs and climbing bond yields.

Trump has repeatedly pledged to curb wasteful spending, reduce annual deficits and bring down the national debt. However, federal debt rose substantially during his first term, from around $19.9 trillion in 2017 to $27.8 trillion in 2021. The increase coincided with tax cuts, higher defence spending and multi-trillion-dollar relief measures introduced during the Covid-19 pandemic.

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Tariff refunds add to the budget gap

Refunds linked to Trump's tariffs also weighed on government finances after the US Supreme Court struck down his global duties in February, triggering repayments to importers.

Treasury data showed that customs refunds totalled $145 billion during the fiscal year, primarily due to tariffs, offsetting a significant portion of the revenue generated by the duties.

Overall government revenue rose by 3 per cent to $5.40 trillion in the fiscal year, which ended on September 30. However, expenditure increased at twice that rate, climbing 6 per cent to $7.40 trillion.

The widening gap between revenue and spending has added to concerns over the sustainability of US public finances as debt-servicing costs continue to rise.