US fiscal pressure continues to intensify: Deficit reaches $1.97 trillion in the first 11 months of FY26, with debt interest payments surpassing $1 trillion

According to Zhitong Finance APP, the U.S. federal government fiscal deficit remains at a historic high. Data released by the U.S. Treasury Department on Friday shows that for the first 11 months of fiscal year 2026, ending in August, the federal budget deficit reached $1.97 trillion, still one of the highest levels for the period on record. Meanwhile, rising interest rates pushed government debt interest payments over $1 trillion, putting the U.S. debt burden on a path that could set a new historical record in the coming years.

After calendar adjustments, the deficit for the first 11 months of the fiscal year ending in August was 5% lower than the same period in 2025. In August alone, the U.S. federal budget deficit was $166.8 billion. September is the last month of the fiscal year and typically sees a fiscal surplus due to factors such as the corporate income tax payment deadline. On the revenue and expenditure fronts, as of fiscal year 2026, U.S. federal government spending reached $6.81 trillion, up 3% year-on-year; revenue was $4.85 trillion, also up 3% from 2025 after adjustments. The massive scale of spending means that even if government revenues continue to increase, the fiscal gap remains persistently high.

One of the most prominent pressures currently facing U.S. public finances comes from the ever-rising cost of interest on the national debt. As U.S. Treasury yields climb, the financing costs the Treasury pays on its massive outstanding debt continue to increase. Data show that for the 11 months ending in August, net interest payments by the U.S. federal government have already reached $1 trillion, exceeding defense and most major federal spending categories, and second only to Social Security spending and expenditures by the Department of Health and Human Services for programs like Medicare.

As of the end of August, the average interest rate on marketable U.S. Treasuries had risen to 3.48%, more than two percentage points higher than five years ago. And this figure could continue to rise in the future, because as earlier bonds issued at lower interest rates mature, the U.S. Treasury will need to refinance at the currently higher market rates.

This pressure has increased further in recent weeks. Market concerns over inflation continue to intensify, while expectations of the Federal Reserve raising interest rates to curb price pressures have pushed U.S. Treasury yields to multi-year highs this week. Earlier on Friday, the yield on the two-year Treasury note briefly rose to 4.66%, while the ten-year yield hit 4.98%. This means that the U.S. government must not only cope with a continuously growing principal on its debt, but also bear increasingly higher refinancing costs. As low-interest debt is gradually replaced by high-interest debt, interest payments could continue to squeeze fiscal space.

Besides interest payments, mandatory spending on programs such as Social Security and Medicare continues to push up federal government expenditures. With the retiring population steadily increasing, these welfare programs face growing funding pressures, while Congress shows little willingness to cut benefits or raise worker contributions.

In recent months, tariff refunds have also contributed to the expansion of the fiscal deficit. In February this year, the U.S. Supreme Court ruled that most of the tariff increases implemented by the Trump administration were illegal, and the government subsequently needed to refund part of the already collected tariff revenues.

U.S. Treasury Secretary Baisent previously stated that as the Trump administration introduced new import tariff measures under other laws, he expected that most of the prior tariff revenues would eventually be restored.

After three consecutive months of declining net customs tariff revenues, there was an improvement in August. According to Bloomberg data, U.S. customs tariff revenue recorded a net inflow of $12.8 billion that month.

However, from a longer-term perspective, the U.S. debt trajectory remains worrying. The Congressional Budget Office (CBO) warned in February this year that, at the current pace, the federal government’s debt-to-GDP ratio is expected to exceed 106% by 2030, breaking the historical record set after World War II in 1946.

At the same time, a metric measuring the U.S. public debt balance surpassed the $40 trillion mark for the first time in August this year, further intensifying market concerns over the sustainability of U.S. public finances.

Potential new federal spending plans in the future are also making fiscal tightening prospects even more complex. Trump previously called for further increases in defense spending, and has recently proposed, if Republicans continue to control Congress after the November midterm elections, to issue a $5,000 check to every American adult citizen. These policy proposals have further heightened market concerns over Washington's lack of political will to reduce the budget deficit. With major spending areas such as Social Security, Medicare, defense, and interest on the debt all facing rising pressure, the U.S. government’s space to reduce the deficit is becoming increasingly limited.

However, Baisent has still pledged to unveil a fiscal consolidation plan in the coming weeks or months. He stated that he is currently working with White House budget director Walt to develop related programs.