Final US deficit at $1.99 Trillion for 2026, and higher than expected

At the end of last weekend, the Congressional Budget Office (CBO) gave their monthly budget update for September. This report doubles as the final figures for Federal Fiscal Year 2026, which ended on September 30. And the CBO says the US budget deficit went up by 12% for FY 2026, nearly reaching $2 trillion dollars.

And that increase in the deficit came in the last 6 months, as the first half of FY 2026 actually had smaller deficits than the previous year.

So what changed? There seems to be three main suspects, with the first being a direct result of Trump/GOP Tax Scam 2.0.

Receipts from corporate income taxes decreased by $70 billion (or 16 percent). The 2025 reconciliation act allows corporations to take larger deductions for certain investments, thereby reducing some payments and offsetting the increases in those receipts that otherwise would have been expected, given the rise in corporate income.

The second is the result of another Trump policy that was so illegally done that the GOP hacks on the Supreme Court shot it down.

Collections of customs duties dropped by $22 billion (or 11 percent) relative to the year before. Larger amounts were collected early in the fiscal year, but started to decline in May, when the Administration began to issue refunds related to tariffs imposed under the authority of the International Emergency Economic Powers Act (IEEPA). The refunds were made as a result of a February 2026 decision of the Supreme Court. CBO estimates that during fiscal year 2026 about $130 billion was issued in refunds for tariffs collected under IEEPA.

Those tariff reductions were a main reason that US tax revenues ended up nearly $200 billion below the CBO's projections back in February, along with lower-than-expected corporate revenues - factors that more than offset income taxes coming in better than expected.

The third reason the deficit got larger in FY 2026 was because it costs more to pay for the country's increasing debt.

Outlays for net interest on the public debt rose by $115 billion (or 11 percent) because the debt was larger than it was in fiscal year 2025 and because long-term interest rates were higher. Lower short-term rates partially mitigated the overall rise in payments.

That double-digit increase in interest on the debt came on top of typical 5-8% increases in the "Big 3" expenses of Social Security, Medicare and Medicaid, and other spending from Uncle Sam went up for FY 2026 as well.

The higher deficits and need to sell more bonds to cover it are a main reason behind the spike in Treasury bonds and mortgage rates that we've seen in the second half of 2026. Sure, there's been a decline from last week's peaks in yields, but there's not much of a reason given as to why, and if this week's inflation reports for September come in hot, then it becomes more likely that the Federal Reserve will put in more rate hikes in short-term rates. In addition, a high CPI print on Wednesday will raise deficit projections for Fiscal Year 2027 and beyond, as Social Security would then be set for its highest increase in benefits in 4 years.

I've mentioned before that deficits by themselves aren't a problem UNLESS it results in higher inflation (due to higher demand or deflated dollars), or it raises interest rates and leads to recession due as debt becomes too expensive and demand flags. The dollar has actually strengthened in recent months, so no problem there (although inflation has gone up due to a stupid war in the Mideast constraining oil and gas supplies).

But we also get to see this week what happened to consumer spending in September, after gas prices and the Fed Funds rates both went up. And given how weak wage growth has been, there isn't much to keep everyday Americans to keep up the strong pace they had in the Summer. Combine that with a Bubbly stock market that seems hevily reliant on increasingly expensive debt, and the chances the FY 2027 fiscal deficit exceeds $2 trillion in the next CBO estimates seem to be increasing.