The federal government closed fiscal year 2026 with a staggering $1.99 trillion budget deficit, a 12% increase from the previous year, as Washington’s spending continued to outpace revenues and soaring interest payments on the national debt consumed an increasingly significant portion of the federal budget.

According to Treasury Department data released Friday, the federal deficit widened from $1.78 trillion in fiscal 2025 to nearly $2 trillion in fiscal 2026, an increase of approximately $217 billion .

The latest figures underscore the mounting fiscal challenges facing Washington, particularly as the federal government must borrow hundreds of billions of dollars annually simply to cover interest on money it has already borrowed.

Total federal spending climbed approximately 6% to $7.4 trillion in fiscal 2026, compared with roughly $7 trillion the previous year. That represents an increase of approximately $400 billion in annual government expenditures. This means federal spending grew by almost 6% — almost double the rate of inflation for the same period .

Meanwhile, federal revenues rose approximately 3% to $5.4 trillion, leaving collections substantially below total spending. The imbalance means Washington spent approximately $1.37 for every dollar it collected in revenue .

Social Security and Medicare remained the government’s two largest spending categories, reflecting the enormous costs associated with retirement benefits and health care for an aging population .

But the third-largest spending category highlights another growing financial burden: net interest on the national debt. Interest costs have surged as higher borrowing rates and the growing national debt force the Treasury to devote more money to servicing existing obligations .

Annual interest expenditures now exceed federal spending on national defense and Medicaid, placing debt servicing among the government’s largest financial commitments. The Treasury’s net interest payment burden is about $1 trillion annually. That means interest expenses alone account for nearly half of the government’s approximately $2 trillion annual budget deficit .

Unlike direct spending on government programs, interest payments do not purchase new infrastructure, military equipment, or public services. Instead, they compensate investors holding Treasury securities issued to finance previous federal borrowing. Higher market interest rates can compound the problem as older Treasury securities mature and must be refinanced at higher borrowing costs .

The Treasury’s latest Monthly Treasury Statement also showed the federal government borrowed approximately $27 billion in September, the final month of fiscal 2026 .

The nearly $2 trillion annual shortfall raises fresh concerns about the long-term sustainability of federal finances, particularly if borrowing costs remain elevated. Although the United States recorded larger annual deficits during the COVID-19 pandemic, the latest figures demonstrate that substantial federal borrowing remains a persistent challenge .

Without substantial spending restraint, stronger revenue growth, or lower borrowing costs, Washington faces the prospect of an increasingly expensive cycle in which new debt is issued partly to finance interest on existing debt .