The U.S. federal budget deficit is on track to surpass $2 trillion this fiscal year, marking one of the largest shortfalls in American history as government spending growth continues to outpace tax receipts.

The nonpartisan Congressional Budget Office (CBO) released its monthly budget update for July on Monday, revealing that the federal government ran a deficit of nearly $1.8 trillion through the first ten months of fiscal year 2026, which ends September 30. That figure represents a $169 billion increase compared to the same period in fiscal year 2025. Federal spending rose by $308 billion year over year, significantly outpacing the $139 billion increase in tax revenue.

The CBO now projects the full-year fiscal 2026 deficit will reach $2.1 trillion, an increase of $200 billion over the previous fiscal year, based on data available through the end of July.

"CBO expects 2026 outlays to be close to the February baseline amounts. Revenues, by contrast, are anticipated to be about $200 billion below the February projections, mostly because of smaller-than-expected collections of tariff duties – a result of a Supreme Court ruling handed down after CBO's baseline was released," the agency wrote.

The growth in spending was driven primarily by the rising cost of servicing the federal government's more than $39 trillion national debt, along with increased outlays for the three largest mandatory spending programs: Social Security, Medicare, and Medicaid. The mix matters because these categories are built into the budget and tend to rise with interest rates, enrollment, and benefit adjustments, making it harder for revenue gains alone to close the gap.

Net interest costs on the national debt climbed $117 billion, or 14%, during the first ten months of fiscal year 2026 compared to the same period a year earlier. The increase was attributed to higher long-term interest rates and the expanding national debt.

Social Security benefit spending rose $70 billion, or 5%, driven by higher average benefit payments following inflation adjustments and a growing number of beneficiaries. Medicare spending increased $66 billion, or 8%, due to rising enrollment and higher healthcare payment rates. Medicaid expenditures were up $45 billion, or 8%, reflecting higher costs per enrollee.

On the revenue side, combined payroll and income tax collections grew by $202 billion, or 5%, year over year. Withholdings from workers' paychecks rose $141 billion, or 5%, amid higher wages and salaries. Individual tax refunds increased $23 billion, or 7%, due to provisions in the One Big Beautiful Bill Act (OBBBA).

Corporate income tax collections, however, fell by $89 billion, or 23%, as a result of OBBBA provisions that expanded investment deductions and reduced overall tax receipts.

Customs duty collections, including tariffs, rose $18 billion, or 13%, compared to the same period a year ago. Monthly collections were higher year over year through April, but net collections dropped sharply beginning in May, when the government started issuing tariff refunds in response to a February Supreme Court ruling. The CBO reported that approximately $100 billion in tariff refunds have been issued to date.

Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget (CRFB), said in a statement that federal borrowing has reached an "astounding" level and noted that a deficit exceeding $2 trillion during a period without recession "is not normal."

"Incredibly, such an enormous level of borrowing barely scratches the surface of our fiscal deterioration," she said. "We are about to hit the sobering milestone of $40 trillion in gross national debt, and things are only likely to get worse."

"If lawmakers want to correct our fiscal course, they should start by targeting a reasonable fiscal goal, like 3% of GDP deficits, and then create a bipartisan commission to figure out how we should get there. We can no longer afford to put off the difficult decisions – the time to act is now," MacGuineas added.

Source: Fox Business