According to Treasury Department data released on Friday, the federal budget deficit widened to $1.99 trillion, 12% worse than the $1.78 trillion gap in fiscal 2025.

That came as revenue increased 3% to $5.4 trillion, lagging behind the 6% bump in spending to $7.4 trillion. Social Security and Medicare were the biggest line items, but in third place was interest payments on the national debt, topping defense spending and Medicaid.

Gross interest costs for fiscal 2026 came in at $1.36 trillion, Treasury data show, with an average interest rate of 3.53%. That’s more than double the rate in 2021, just before the Federal Reserve embarked on an aggressive tightening cycle to rein in inflation.

Net interest payments rose 8% to $1.05 trillion, outpacing increases in total spending, revenue and GDP. In fact, it exceeds real GDP growth of about 2% as well as nominal GDP growth of about 6%.

Fiscal 2026’s net interest costs translate to about $2.9 billion a day, and the Peter G. Peterson Foundation estimated they represent 3.2% of GDP, breaking the previous record set in 1991.

With gross U.S. debt at $40 trillion, publicly held debt at 100% of GDP, and borrowing costs up, interest payments are projected to be the fastest growing portion of the federal budget in the coming years.

At the same time, the debt burden is being increasingly exposed to market volatility that threatens to make interest costs even steeper.

Treasury Secretary Scott Bessent has been issuing more short-term debt to finance the deficit and is retiring long-term obligations.

Now, about one-third of publicly held debt, or more than $10 trillion, is due to mature within the next 12 months, meaning the federal government must roll it over at today’s higher rates.

In February, the Congressional Budget Office projected annual debt interest expenses will reach $2.1 trillion by 2036. But then President Donald Trump launched the Iran war, which sent oil prices and bond yields soaring.

The 10-year Treasury yield is now above 5%, blowing past the CBO’s forecasts for 4.1% this year, 4.2% in 2027, 4.3% from 2028 to 2031, and 4.4% from 2032 to 2036.

Treasury Department

If bond yields remain about 1 percentage point above the CBO’s estimates, interest costs will surge to $2.8 trillion, or 5.9% of GDP, by the end of the decade, according to the Committee for a Responsible Federal Budget. 

“Higher interest begets more debt, and greater debt begets higher rates and higher interest. Eventually, the whole thing could come crashing down,” CRFB President Maya MacGuineas said last month.

“That’s why Washington needs a fiscal intervention now, before it’s too late. The President, the Treasury Secretary, and Congressional leadership need to understand the severity of this issue. There are no easy fixes, and we can’t just wish this problem away.”

But so far, there’s no sign of much willingness to tackle spending or revenue. Trump has even called for a $5,000 “dividend” check to Americans if Republicans win the midterm elections and is already handing out “rebates” to millions of Medicare and Affordable Care Act enrollees.

Meanwhile, Bessent has argued that heating up the economy further can get the debt under control.

“With 3% growth, we grow our way out of this,” he said at Southern Methodist University last month. “We’ll get to the other side of this Iran conflict, and the underlying economy is very, very strong, and I think reaccelerating.”

But CBO Director Phillip Swagel said last week that faster economic growth is unlikely to keep U.S. debt in check. While stronger economic growth will help by bringing in more revenue for the federal government, it’s not that simple.

Federal spending also boosts growth, which lifts wages that in turn affect outlays on Social Security benefits, he pointed out. A robust economy also tends to send interest rates higher, which adds to debt interest costs.

Assuming interest rates of 4% to 5%, Swagel estimated that nominal GDP growth would have to reach 7%-8%, and real GDP growth would have to hit 5%-6% in order to stabilize the debt.

That’s more than double the latest real GDP pace of 2.2% in the second quarter. Meanwhile, even bullish Wall Street forecasts put full-year GDP growth at 2.5%.

“So growth will help, but it’s probably not plausible that growth alone will stabilize our fiscal trajectory,” he said. “So then we’re left with changes in revenues and changes in spending, and those are political choices.”