The United States closed its 2026 fiscal year with a staggering budget deficit of nearly $2 trillion, marking the largest annual shortfall in five years as the government grappled with record-breaking debt-servicing costs, massive tariff refunds, and soaring military expenditures tied to the war on Iran.

According to Treasury Department figures released on Friday, the deficit rose by $217 billion to $1.99 trillion for the year ended September 30.

This represents the first full budget year of President Donald Trump's second term and is the widest gap since the $2.77 trillion pandemic-fueled deficit of fiscal 2021. It also stands as the third-largest annual deficit in US history.

While the federal government collected a record $5.40 trillion in total receipts—up 3% from the previous year—revenue was vastly outpaced by record outlays of $7.40 trillion, a 6% increase driven by mandatory social programs and mounting interest payments.

A primary driver of the red ink was the exorbitant cost of carrying the nation's debt.

With the total US national debt breaching the $40 trillion milestone just two months ago, debt-service outlays skyrocketed by 12% to a record $1.36 trillion.

This interest burden has now eclipsed almost all other government spending, trailing only Social Security and the combined costs of Medicare and Medicaid.

The shortfall was further widened by a dramatic reversal in trade policy revenue.

Following a Supreme Court ruling earlier this year that negated a large portion of the tariffs Trump imposed during his first year in office, the government was forced to issue $145 billion in refunds.

Consequently, net tariff receipts plummeted by 11% to roughly $173 billion, stripping the Treasury of a key revenue stream the administration had previously relied upon.

Continued increases in spending for social benefits programs like Social Security and Medicare also factored heavily into the expanding gap.

Defense spending also surged, climbing 6% to $917 billion—a $48 billion jump from the prior year.

While a Treasury official declined to specify exactly how much of this increase could be directly attributed to the US-Israeli war of aggression against Iran launched earlier this year, the financial toll of the prolonged war is widely understood to be a significant factor in the Pentagon's expanding budget.

The war has not only driven up direct military outlays but has also severely disrupted global energy markets, further complicating the domestic economic landscape.