NEW YORK — As public finances deteriorate rapidly across advanced economies in Europe and Japan, the U.S. federal government's books have also worsened over the past year. Refund obligations arising from the Supreme Court ruling that struck down reciprocal tariffs, combined with a surge in Treasury yields following the war in the Middle East, are driving outlays sharply higher. President Donald Trump's tax cuts and military spending tied to the war with Iran are adding further pressure. Given high oil prices and elevated inflation, Wall Street expects the U.S. deficit, now in its 25th year, to have little chance of swinging back into surplus anytime soon. The worsening fiscal picture is also seen as a major drag on Trump and the Republican Party heading into next month's midterm elections.
U.S. Interest Costs Hit $1.05 Trillion in One Year on Rising Yields, Exceeding Defense Spending
The federal deficit for fiscal 2026, which ran from Oct. 1, 2025, through Sept. 30, 2026, totaled $1.992 trillion, according to the Treasury Department on the 16th. That was more than 10% above the $1.817 trillion recorded in fiscal 2024 and the $1.809 trillion in fiscal 2025. It was also the third-largest annual deficit in U.S. history, after 2020 and 2021, when large pandemic-era stimulus packages were disbursed. The figure extends an unbroken run of deficits dating to 2002, the year after the last federal surplus in 2001 — 25 consecutive years. The Treasury estimated the fiscal 2026 deficit at 6.2% of gross domestic product, according to Reuters, up 0.4 percentage points from 5.8% in fiscal 2025.
Both revenue and outlays hit record highs. Revenue rose 3% to $5.403 trillion, while outlays climbed 6% to $7.396 trillion. Rising Treasury yields pushed total interest payments to a record $1.36 trillion. Net interest costs also rose 8.2%, or $80 billion, to $1.052 trillion from $970 billion in fiscal 2025. That was far above defense spending of $917 billion. Total interest payments cover all interest on Treasury securities issued by the federal government, while net interest costs subtract interest income the government earns elsewhere.
Bloomberg reported that federal debt on which interest is paid reached $32 trillion, roughly $10 trillion more than five years ago. The average rate the federal government paid on marketable Treasury debt this year also more than doubled, to 3.52% in fiscal 2025 from 1.47% five years earlier. Beyond interest costs, spending on Social Security, the largest single outlay, and on Medicare, the public health insurance program, rose to $1.667 trillion and $1.073 trillion, respectively.
The United States previously ran deficits for 28 consecutive years, from 1970 through 1997. That run, which began under former President Richard Nixon, ended only during the presidency of former President Bill Clinton. The drivers then included accumulated military spending from the Vietnam War, the recession triggered by the oil shocks, and the large tax cuts and military buildup under former President Ronald Reagan. Sustained spending restraint and higher tax receipts from the information technology boom allowed the United States to post surpluses for four years, from 1998 through 2001, under Clinton.
The current deficit is viewed as more serious than in the past because mandatory spending, which is difficult to cut, accounts for a large share of outlays. With Treasury yields also running very high, the consensus on Wall Street and in Washington is that a return to surplus within three to four years is effectively impossible. That points to the longest stretch of deficits on record. The national debt has topped $40 trillion since mid-August, a first. Compared with $36 trillion at the end of November 2024, shortly after Trump won the presidential election, the debt has swelled by $4 trillion, or more than 10%, in less than two years.
Trump's push for smaller government, launched aggressively after he returned to office in January last year, failed to deliver results because of a combination of structural fiscal problems and contradictory policies. The impact was especially large after the Supreme Court struck down reciprocal tariffs on Feb. 24 this year, triggering large refunds to importers. The so-called One Big Beautiful Bill Act, which Trump signed on July 4 last year, also contributed. The law's core provision extended temporary corporate tax cuts that Trump introduced during his first term in 2017, rather than letting them expire at the end of last year. It also included cuts to Medicaid, the health insurance program for low-income Americans, the Children's Health Insurance Program and food stamps.
Tax Cuts, Tariff Refunds, the Iran War and Treasury Selling by China and Japan Accelerate Fiscal Strain; Musk Says "AI Is the Only Answer"
The shock from the war with Iran, which began with surprise U.S. and Israeli airstrikes on Feb. 28, poured fuel on the fire. A conflict expected to end within a month has now dragged into its eighth, pushing international oil prices above $100 a barrel. Higher crude prices fed through to sharp increases in U.S. gasoline and diesel prices, which, along with tariffs, spread into broad-based producer and consumer price increases. The unexpected inflation eroded the value of U.S. Treasurys, and late last month the 10-year yield, the global bond market's benchmark, broke above 5.3% for the first time in 24 years, since 2002. An oversupply of corporate bonds, driven by Big Tech's race to invest in artificial intelligence, also played a part.
Tariffs have blunted revenue gains in a number of cases. The price of hot-rolled coil, the U.S. steel benchmark, reached $1,255 per short ton, or about 907 kilograms, on tariff effects, Bloomberg reported on the 16th. That was the highest since May 2022 and 52% above the level a year earlier. The Trump administration imposed 25% product-specific tariffs on imported steel, aluminum and copper on March 12 last year. It then raised the steel and aluminum tariffs to 50% from June and applied the same rate to copper from July of that year. U.S. imports of finished steel totaled about 13 million tons from January through September this year, down 14% from the same period last year, according to the American Iron and Steel Institute. Imported finished steel's share of the overall U.S. market also fell to 16% this year from 19% in the same period last year. Bloomberg noted that U.S. hot-rolled coil is among the most expensive in the world, at roughly 1.5 times European prices and about three times Chinese prices.
As concerns over federal debt grew, China and Japan sharply reduced their holdings of U.S. Treasurys in August, according to the Treasury Department. China's holdings fell for a third straight month, to $590.7 billion in August from $618 billion in July, a 15.5% decline from a year earlier. That was the lowest level since the $573.7 billion recorded in August 2008, during the global financial crisis, according to the South China Morning Post and Reuters. China's Treasury holdings have been declining since peaking at $1.316 trillion in November 2013. In March last year, China ceded its position as the second-largest holder of U.S. Treasurys to the United Kingdom.
Japan, the largest holder, also cut its holdings, to $1.0683 trillion in August from $1.1039 trillion in July. Japan's Treasury holdings have fallen for four consecutive months to the lowest level since December 2024, according to Bloomberg.
Over the same period, the United Kingdom, in second place, raised its holdings to $1.0095 trillion from $998.3 billion; Belgium, in fourth, to $490.5 billion from $470.7 billion; and Canada, in fifth, to $464.6 billion from $426.3 billion. Helped by European buyers, total foreign holdings of U.S. Treasurys rose to $9.3317 trillion in August from $9.2484 trillion in July.
Elon Musk, chief executive of SpaceX, who led the Department of Government Efficiency from January to May last year in the early months of Trump's second term and pushed through spending cuts and layoffs of federal employees, voiced skepticism that U.S. government institutions alone can resolve the national debt. The U.S. online outlet Axios reported on the 17th that Musk, speaking on biographer Walter Isaacson's podcast "The Builders," said there was no way to fix the deficit from inside the government. According to Axios, Musk said austerity alone could not solve the problem and that the only way to address the national debt was to use artificial intelligence and robots. Musk also said there was no political will to cut spending in the White House, the Senate, the House or the judiciary, and that trying to tackle deficits and curb wasteful spending makes enemies. He added that Trump likes to be liked and does not want anyone getting angry over cutoffs in support payments.
Musk also expressed regret over stepping away from running his companies to focus on the government efficiency effort. He said he should have stayed behind the scenes longer and should have returned to focus on AI somewhat earlier.
Republicans Lose Edge on Economic Trust to Democrats for First Time in 12 Years; Easing of Russia Sanctions Among Biggest Election Liabilities
The swelling national debt has narrowed Trump's room for maneuver on economic policy and is weighing on the midterm elections. Trump's job approval rating fell to 33% from 37% in July, the lowest of his second term, according to a Washington Post-ABC poll conducted by Ipsos and released on the 18th, with a margin of error of plus or minus 2 percentage points. Sixty-six percent said they disapproved of his performance, including 52% who strongly disapproved. An NBC poll released the same day also showed Trump's approval at a low of 34%, with 66% disapproving and 51% strongly disapproving. Even a poll released on the 14th by the conservative-leaning Fox News put his approval at 36%, the lowest across both of his terms.
In the Washington Post-ABC survey, 58% said they preferred a Democratic-led Congress, while just 39% favored Republicans. Seventy-five percent of Democratic voters said they would definitely vote, compared with 57% of Republicans who do not identify with MAGA, the Make America Great Again movement.
Inflation again proved the heaviest blow to Trump's standing. Disapproval reached 70% on economic policy and 77% on the cost of living. Approval of his economic policy slid to 28% from 41% in February and 33% in July. At the equivalent point before the midterm elections in Trump's first term, in 2018, approval of his economic policy stood at 49%, far above the current level.
Forty-eight percent of respondents said their own financial situation had worsened since Trump returned to office, the highest figure in Washington Post-ABC surveys of U.S. presidents since 1986. Among those reporting financial strain, 71% of independent voters said they preferred the Democrats. In a February survey, before the war with Iran began, 71% said gasoline prices were affordable; in the latest poll, 71% said gasoline prices were now unaffordable.
Sixty-five percent said the war with Iran was a mistake by Trump, and 68% disapproved of his treatment of U.S. allies. Among respondents who said they voted for Trump in the 2024 presidential election, 31% disapproved of his handling of the economy and 38% criticized his response to inflation. Sixty-six percent said Trump was using his position to accumulate wealth. Asked which party they trusted more to handle the economy, respondents favored the Democrats at 40% over the Republicans at 33% — the first such result in the survey since 2014.
With pressure mounting, Trump has not hesitated to roll out policies that benefit Russia, an adversary. On the 9th, he announced an agreement with Russian President Vladimir Putin to supply Russian diesel to the U.S. and global markets. On the 16th, he said he would waive the application of Russia sanctions provisions, including measures imposing tariffs of up to 100% on buyers of Russian energy. Those sanctions were enacted under legislation spearheaded by the late former Sen. Lindsey Graham, who died on July 11 this year. Graham, who chaired the Senate Budget Committee, had been regarded as one of Trump's closest allies. Trump signed the bill on the 18th of last month, and it was due to take effect a month later, on the 18th of this month. The move drew strong objections within the Republican Party, including from Graham's younger sister, Sen. Darlene Graham.
The widening deficit looks set to weigh on Trump and the Republicans throughout the run-up to the Nov. 3 midterm elections. Rising Treasury yields presuppose higher inflation and can also raise private borrowing costs, including on mortgages. In the bond market on the 19th, the 10-year Treasury yield, which had been stable for a time, climbed sharply to as high as 5.150% during the session. The 30-year yield, a reference for U.S. mortgage rates, rose to 5.488%, and the policy-sensitive two-year yield to 4.782%.
※ "Trump Stocker" is a column delivering on-the-ground reporting and analysis of U.S. markets, companies, policy, politics and diplomacy that may be useful to investors during President Donald Trump's tenure. Subscribe to receive news from the United States.