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CBO Raises FY2026 Deficit Forecast to $2.1 Trillion as July Shortfall Deepens

Tariff refunds, rising interest payments, and larger Social Security and Medicare costs are worsening the fiscal gap and forcing more Treasury borrowing.

The American flag waves from the U.S. Capitol in Washington, D.C., U.S., March 1, 2026. REUTERS/Annabelle Gordon/File Photo
US federal deficit is expected to hit $2.1 trillion in 2026 as spending rises faster than tax revenue, while debt interest and benefit costs climb.
Photo: Macieklew / Wikimedia Commons / CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)
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Overview

  • The nonpartisan Congressional Budget Office said in its monthly update Monday that it now expects a roughly $2.1 trillion deficit for fiscal year 2026, about $200 billion higher than its February forecast.
  • The U.S. Treasury reported a $432.3 billion deficit in July, the largest July shortfall since March 2021, which pushed the fiscal-year-to-date gap to about $1.8 trillion through the first 10 months.
  • A key driver of the upward revision is weaker customs receipts after the Supreme Court invalidated some IEEPA-based tariffs, with roughly $100 billion refunded so far and CBO estimating tariff collections about $250 billion below earlier expectations.
  • Net interest costs have surged, totaling roughly $963 billion between October 2025 and July 2026—about $3.18 billion per day—which is amplifying outlay growth and Treasury borrowing needs.
  • With gross federal debt approaching $40 trillion and the debt-to-GDP ratio near 122%, higher deficits raise the risk of upward pressure on yields and borrowing costs while legal and policy uncertainty over tariff authority complicates near-term revenue fixes.