The federal government closed fiscal year 2026 on September 30 with a deficit of about $2.0 trillion, according to the Congressional Budget Office’s Monthly Budget Review released October 8. That is $218 billion more than the $1.8 trillion gap in FY2025. September alone added $28 billion.
The headline number is not a surprise; Treasury data through August already showed $1.97 trillion in red ink. What matters is the composition. Revenue rose. Spending rose more than twice as fast. And two policy choices from the past 15 months, the business tax changes in the July 2025 reconciliation law and the court-ordered unwinding of emergency tariffs, show up clearly in the receipts.
1. The top line
CBO estimates outlays rose $386 billion (6%) to about $7.4 trillion, while revenue rose $169 billion (3%) to about $5.4 trillion. The Committee for a Responsible Federal Budget puts the deficit at about 6.2% of GDP.
| Line | Change vs. FY2025 | Percent |
|---|---|---|
| Revenue | +$169B | +3% |
| Individual income taxes | +$188B | +7% |
| Payroll taxes | +$67B | +4% |
| Corporate income taxes | −$70B | −16% |
| Customs duties | −$22B | −11% |
| Other | +$6B | +3% |
| Outlays | +$386B | +6% |
| Net interest | +$115B | +11% |
| Social Security | +$86B | +5% |
| Medicare | +$77B | +8% |
| Medicaid | +$55B | +8% |
| Defense (military activities) | +$48B | +5% |
| Veterans’ benefits | +$39B | +10% |
| Other programs | −$33B | −2% |
2. Interest is now the fastest-growing big bill
Net interest added $115 billion, more than any other line on the spending side. It is the arithmetic of a larger debt rolling over at higher rates. Total public debt passed $40 trillion on August 18, 2026, according to Treasury’s Debt to the Penny data, and every new deficit adds to the base on which interest is charged.
The three big entitlement programs together added $218 billion: Social Security, Medicare and Medicaid. That growth is mostly demographic and automatic, driven by enrollment, cost-of-living adjustments and health-care prices rather than new legislation. Defense and veterans’ benefits added another $87 billion combined.
Interest and the three big entitlements alone grew $333 billion, nearly double the entire increase in revenue.
3. Where revenue fell short
Individual income taxes did the heavy lifting, up $188 billion. Two lines went the other way.
Corporate taxes fell $70 billion (16%). The drop tracks the business provisions in the 2025 reconciliation law (P.L. 119-21), including larger immediate deductions for certain business investment. Those provisions were designed to front-load the tax benefit, so the revenue cost shows up early.
Customs duties fell $22 billion (11%). That is a striking result in a year with broad Section 232 tariffs in place. The explanation is refunds. After the Supreme Court ruled on February 20, 2026, that the administration could not impose tariffs under the International Emergency Economic Powers Act, Customs and Border Protection began returning the money in May. About $130 billion of the roughly $166 billion in eligible IEEPA refunds went out during FY2026, according to the AAF summary of CBO’s figures.
CBO’s July 31 tariff update put FY2026 net customs revenue about $250 billion below its February baseline and attributed roughly half of that gap to refunding the money collected under IEEPA.
In other words, customs revenue was still flowing from the remaining tariffs, but net receipts were dragged down by one-time refund payments. That drag should largely disappear in FY2027 once the refund queue is cleared. The lost IEEPA revenue does not come back; CBO’s July update raised projected deficits over 2027 to 2036 by about $0.9 trillion because of trade-policy changes.
4. How to read it
Fiscal hawks see a structural problem. CRFB president Maya MacGuineas said the deficit “ranks among the highest deficits in our history – and the highest ever outside of a war or recession.” Defenders of the 2025 law argue that expensing provisions are a timing effect that should pay off in investment, and that refunds are a one-off. Both points can be true at once. The more durable signal is on the spending side: interest and entitlements grow on autopilot, and neither party has proposed a plan that touches them at scale.
Reading the line items from Budapest, the striking thing is how unremarkable a $2 trillion peacetime deficit has become in Washington’s vocabulary. It is reported as roughly in line with expectations, which is accurate and is exactly the problem.
5. What happens next
- Treasury’s final Monthly Treasury Statement for September will replace CBO’s estimate with the official FY2026 total.
- CBO’s fuller FY2026 review is expected in November, per CRFB.
- December 11: The stopgap funding law expires, and with it the current discretionary spending rate.
- Monthly Budget Review: September 2026 — Congressional Budget Office · cbo.gov
- CBO's Updated Budgetary Projections of Tariffs as of July 31, 2026 — Congressional Budget Office · cbo.gov
- Monthly Treasury Statement — U.S. Treasury, Fiscal Data · fiscaldata.treasury.gov
- CBO Estimates $2.0 Trillion Deficit for Fiscal Year 2026 — Committee for a Responsible Federal Budget · crfb.org
- CBO: FY 2026 Budget Deficit Totaled $2 Trillion — American Action Forum · americanactionforum.org
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