After falling by 4% in the first full fiscal year of Donald Trump’s second term, the federal budget deficit surged 12% to an eyewatering $1.99 trillion in FY 2026. As Art Laffer, the creator of the eponymous Laffer Curve, insisted, the sweeping tax cuts of 2025’s One Big Beautiful Bill did not decrease federal revenue. In fact, total federal receipts rose by 3%, with individual income tax and payroll tax collections up 6%. The problem was, as it always has been, Uncle Sam’s spending.
The federal government spent $7.4 trillion this fiscal year, up 6% from last year. Discretionary spending increases were modest: Despite the start of the Iran war, Pentagon spending rose only 5%, and there were actually dramatic spending cuts across the semiconductor manufacturing subsidies, the Environmental Protection Agency, and SNAP food stamps. But mandatory spending increases broke the budget.
Social Security, the single largest line item in the federal budget, rose 5% to nearly $1.7 trillion. Net interest on our $40 trillion national debt, which is now our second largest spending category, rose by 11% to over $1.1 trillion, reflecting what happens when members against the administration say that the U.S. dollar ought not be the world’s reserve currency any longer. The third and fourth largest expenditures were Medicare and Medicaid, which both rose 8% to a cumulative $1.79 trillion.
The federal government collected over $5.4 trillion in total revenue this fiscal year, probably about 17% of our annual economic output and well in line with the average over the past half-century. And of every $20 that the government collected in income taxes, tariffs, and so on, $17 went only to Social Security, Medicare, Medicaid, and financing our existing national debt.
Democrats will gloat at Washington’s abysmal fiscal performance under Trump, but their preferred proposal — taxing the rich, obviously — will only exacerbate the problem. Right now, the robust economic growth unleashed by Trump’s deregulatory regime and the AI and hyperscaler buildout are about the only things keeping the U.S. afloat. The crisis plaguing the country remains the bipartisan refusal to address, reform, and systematically dismantle the entitlements that are driving the deficit up and blowing up the bond market, which remains our last option to finance our existing debt.