[Mises] The Treasury Department released its monthly statement on Friday and has now confirmed what we all suspected: the US federal government, under the Trump Administration, will finish the 2026 fiscal year with an annual fiscal deficit of about $2 trillion. | This is part of the reason why there is no money for a Social Security COLA increase. Until this is fixed there will be no money for a Social Security COLA increase. Write to your Congressperson and Senators. |
Even when adjusted for CPI inflation, however, 2026’s deficit remains the third largest ever, even including the Second World War, when the deficit in 2026 dollars reached an eye-watering $1 trillion.That was considered an off-the-charts deficit at the time. Today, World-War-Two style spending looks quaint compared to Covid-era spending and the past two years of Trump deficits.
Moreover, 2026 is the 25th annual deficit in a row, with the last federal surplus having been recorded during the 2001 fiscal year (measured in nominal dollars.) The US federal government now appears locked in to perennial mega-deficits exceeded only by the runaway spending of the Covid lockdowns when the federal government embarked on an unprecedented effort to spend out trillions of dollars to essentially pay Americans to stay home and not revolt as businesses closed and jobs evaporated.
Since then, federal deficits never even returned to the pre-Covid "normal." Trump-administration spending during his first term was unprecedented for peace time spending outside of a major recession. This helped pave the way for the out-of-control spending that came during the Covid years. The $4 trillion deficit of 2020, of course, occurred entirely during the Trump administration, with Joe Biden taking over four months into the 2021 fiscal year.
Tax receipts have been largely stable, and the Trump administration has repeatedly bragged about raising import taxes on Americans. Studies have shown—including this study from the New York Fed—that Americans pay the lopsided majority of the tariff revenue collected by the administration. Therefore, the rising deficits are being largely driven by continued increases in federal spending. As the new treasury report makes clear. most of this spending comes from entitlement programs like Social Security, Medicare, and Medicaid. Yet, a new major factor under this administration has been rising obligations to pay debt service. The Treasury report shows that interest on the national debt—which now exceed $40 trillion—totals about $1.3 trillion for 2026. That’s up from 2025’s total interest outlay of $1.2 trillion. Interest on the debt is quickly moving toward becoming the second or third largest expense category, behind Social Security and health care....
Not that inflation weighs on the conscience of Donald Trump. Indeed, in recent weeks, Trump has even suggested outright devaluation of the dollar as a means of inflating away the national debt. In a Time magazine interview published October 1, Trump said, "Certain levels of inflation will also pay off that debt very rapidly. Very rapidly." Trump then went on the say that the Fed is allowing interest rates to move too high—which is another way of saying that the Fed isn’t using enough monetary inflation to push interest rates downward.
Needless to say, the massive federal debt, and the continual piling on of trillions of dollars every year, is not going to end in any sort of fiscally sound reform. What is most likely to happen is the federal government will do what Trump has suggested—and what bankrupt Latin American regimes have often done: the US government will inflate away the real value of the debt and continually rely on monetary inflation as the method of managing multi-trillion-dollar annual deficits.
As the Republicans have made very clear in recent years, there is no interest in fiscal reform, even among the allegedly "fiscally conservative" politicians.
| President Trump tried immediately after he was sworn into office in 2017. The politicians made it very clear they were not interested, so he turned to working on what was possible, and made choices about not spending within the executive branch where it was legally possible. This time round he set DOGE to reduce spending due to waste and fraud, which he also controls, and is making serious headway though it still isn’t enough to offset Congressional profligacy. |