For the fiscal year of 2025 ending in September, the government spent $1.22 trillion on interest alone, per Treasury data.

Additionally, the costs were higher because of “higher long‐term interest rates and an increase in the rate of inflation.” Conversely, declines in the short-term interest rate partially mitigated the overall rise in payments.

Moving into 2026, the Treasury’s budget will get little relief from the rising costs of America’s $38.4 trillion national debt burden. While the short-term base rate decreased thanks to cuts from the Fed last year, analysts are widely expecting the base rate to decrease at a slower pace in the New Year.

For example, Polymarket’s odds that at the next Federal Open Market Committee (FOMC) meeting in a little over a fortnight’s time will result in no change currently sits at 95%. Meanwhile, the likelihood of a 25bps cut from the current rate of 3.5% to 3.75% sits at approximately 4%. CME’s FedWatch index shows similar odds.

Elsewhere, the CBO’s preliminary projections for inflation suggest some relief may be on the cards. In its “View of the Economy” report released last week, the nonpartisan organization wrote it expects price increases to slow this year: The Core PCE Price Index will likely sit at 3.2% on an annual rate in Q1 2026, and down to 2.9%, 2.7% and 2.5% for the following three quarters, it said.

2026 will also be a potentially pivotal year for government budgets. President Trump had earmarked tariff revenue to offset—or even pay down—the national debt. Since then, the plan has gone somewhat awry with the Oval Office instead promising various cash payments to the American people. Separately, the U.S. Supreme Court will soon rule on the legality of the tariffs themselves.

This, said the American Enterprise Institute’s Desmond Lachman, is a significant concern. Speaking to Fortune last week, Lachman said the budget situation is “really, very bad.” He added: “The biggest threats to the budget [include] the Supreme Court is hearing a case … and one would expect they can be ruling within the next few months, that they can reverse all of Trump’s tariffs that he introduced on a national emergency basis. That would really be a very big hit to the budget.”  

“The other thing that would add to the budget in really a very big way … is Trump’s promise to give people $2,000 using the import tariffs revenues that he’s going to get—those are really big factors.”

Deficit reduction

The federal budget is headed in the right direction. The CBO reported that the deficit totaled $601 billion in the first quarter of the fiscal year 2026, which is $110 billion less than the deficit recorded the same period last year. This was because revenues rose by $141 billion while outlays were $31 billion higher, precisely the same amount as the increase in interest payments.

Some of that reduction came from a decrease in spending: outlays from the Environmental Protection Agency decreased by $19 billion (or 81%), CBO estimates, because a year prior the department invested $20 billion under a clean energy grant program. Likewise spending by the Department of Homeland Security decreased by $12 billion, primarily because the Federal Emergency Management Agency spent more for hurricane relief during the same period last fiscal year.

However, the biggest offset came from customs duties—including that all-important tariff revenue. This fiscal year, the CBO said, duties were more than four times the amount recorded in the same first three months of last year, an increase of $70 billion.