Federal interest expense now rivals defense spending, and in fact exceeds it. In the first nine months of fiscal 2026 (October 2025 through June 2026) the Treasury recorded net interest outlays of $827.2 billion, compared with $713.1 billion for national defense, according to the June Monthly Treasury Statement [1]. The Congressional Budget Office's February 2026 baseline projects net interest of $1.0 trillion, or 3.3% of GDP, for the full fiscal year, above projected defense spending of $885 billion, and it expects interest to exceed defense in every year of the ten year outlook [2][3]. This article reviews the fiscal 2026 deficit data behind those numbers and why interest, not any single program, has become the budget's fastest growing item.
Fiscal 2026 deficit data through June
Through June the federal government took in $4,151.4 billion and spent $5,517.9 billion, producing a deficit of $1,366.5 billion [1]. That is $29 billion larger than the $1,337.4 billion deficit in the same nine months of fiscal 2025, because receipts grew 3.6% while outlays grew 3.2% from a higher base [1]. June itself showed a $120.3 billion deficit, compared with a $27.0 billion surplus in June 2025, mainly because June 2026 included the semiannual interest payment to federal trust funds and because customs duty refunds turned that revenue line negative for the month [1].
| Item (fiscal year to date through June) | FY2026 | FY2025 | Change |
|---|---|---|---|
| Total receipts | $4,151.4 bn | $4,008.1 bn | +3.6% |
| Total outlays | $5,517.9 bn | $5,345.5 bn | +3.2% |
| Deficit | $1,366.5 bn | $1,337.4 bn | +2.2% |
| Net interest | $827.2 bn | $748.7 bn | +10.5% |
| National defense | $713.1 bn | $682.4 bn | +4.5% |
| Social Security | $1,243.8 bn | $1,181.0 bn | +5.3% |
| Medicare | $780.3 bn | $723.4 bn | +7.9% |
Source: Monthly Treasury Statement, June 2026, Tables 1, 3 and 9 [1].
Receipts: individual taxes up, corporate taxes down
The receipts side is uneven. Individual income taxes rose 6.6% to $2,195.7 billion, and customs duties rose to $163.0 billion from $108.0 billion a year earlier despite $81.3 billion of refunds year to date [1]. Corporation income taxes fell 23.7% to $279.3 billion, reflecting expanded expensing provisions enacted in 2025 that let firms deduct investment sooner [1]. Lower corporate receipts in the short run are the flip side of stronger capital investment, which the Federal Reserve has described as strong in its recent statements.
Why interest expense is growing faster than everything else
Net interest rose 10.5% year over year, roughly twice the growth rate of defense and faster than Social Security or Medicare [1]. Gross interest on Treasury debt securities, before netting out interest received by trust funds, was $1,052.0 billion through June, up from $921.0 billion a year earlier [1]. The Treasury's full year budget estimate for gross interest is $1,301.3 billion [1].
Two forces drive this. The stock of debt is larger every year because deficits are financed by new borrowing. And the average interest rate on the debt keeps rising as securities issued at very low coupons before 2022 mature and are refinanced at yields near 4%. Neither force depends on Congress passing a new spending bill; the interest line grows on autopilot.
Interest as a share of revenue
- CBO projects interest costs at 19% of federal revenue in fiscal 2026, up from 9% in 2021, and rising to 26% by 2036 [2].
- Net interest is projected to double from $1.0 trillion in 2026 to $2.1 trillion in 2036, reaching 4.6% of GDP, the highest share on record [2][3].
- Over the next ten years, CBO's figures imply that 66 cents of every new dollar borrowed goes to pay interest on existing debt [2].
What CBO projects for the full year and the decade
CBO's February baseline puts the fiscal 2026 deficit at $1.9 trillion, or 5.8% of GDP, with revenue at 17.5% of GDP and outlays at 23.3% of GDP [2][3]. Both revenue and spending are above their 50 year averages of 17.3% and 21.2%, which means the deficit is a spending problem more than a revenue problem [2]. Debt held by the public is projected at 99% of GDP in 2026 and 120% of GDP by 2036, and cumulative deficits over 2027 to 2036 total $24.4 trillion [3]. Mandatory spending plus interest is projected to consume 75% of the budget in 2026 and 80% by 2036, leaving discretionary programs, including defense, a shrinking share [2].
Set against nominal GDP of $31.9 trillion at an annual rate in the first quarter of 2026, as shown in DataPorium's economic metrics, the nine month deficit of $1,366.5 billion already equals about 4.3% of a full year of output, with three months of the fiscal year still to run [1][4].
What the numbers mean for growth and markets
From a market oriented and fiscally conservative standpoint, the interest line is the clearest argument for spending restraint. Interest payments do not buy security, infrastructure or research; they compensate past borrowing. When interest consumes 19% of revenue, every point of higher yields costs the Treasury tens of billions of dollars, which raises the stakes of any inflation surprise. Heavy issuance also competes with private borrowers for savings, which tends to keep long term yields and mortgage rates higher than they would otherwise be.
The fair counterpoint is that receipts are growing and the deficit as a share of GDP is not rising in fiscal 2026. Growth is doing part of the work. But growth alone cannot close a gap of 5.8% of GDP when interest compounds at roughly 4%. Investors may consider that the path of the 10-year Treasury yield is now as much a fiscal variable as a monetary one, and that policies that raise productivity and slow spending growth are the ones most likely to reduce long term borrowing costs.
Net interest of $827 billion through June already exceeds the $713 billion spent on national defense, and CBO projects that interest will take 19 cents of every revenue dollar in fiscal 2026.
Key takeaways
- The fiscal 2026 deficit reached $1,366.5 billion through June, slightly larger than a year earlier; receipts rose 3.6% and outlays 3.2% [1].
- Net interest ($827.2 billion) exceeded national defense ($713.1 billion) year to date, and grew 10.5% versus 4.5% for defense [1].
- CBO projects net interest of $1.0 trillion (3.3% of GDP) in fiscal 2026 versus $885 billion for defense, rising to $2.1 trillion (4.6% of GDP) by 2036 [2][3].
- Interest is projected at 19% of federal revenue in 2026 and 26% by 2036; debt held by the public is projected to reach 120% of GDP by 2036 [2][3].
- Corporate income tax receipts fell 23.7% while individual income taxes rose 6.6%, reflecting expanded investment expensing [1].
Frequently asked questions
Does the U.S. spend more on interest than on defense in 2026?
Yes. Net interest outlays were $827.2 billion in the first nine months of fiscal 2026 versus $713.1 billion for national defense, and CBO projects $1.0 trillion of net interest against $885 billion of defense spending for the full year [1][3].
What is the federal deficit so far in fiscal year 2026?
Through June 2026 the deficit was $1,366.5 billion, with receipts of $4,151.4 billion and outlays of $5,517.9 billion; CBO's baseline projects $1.9 trillion, or 5.8% of GDP, for the full fiscal year [1][2].
Why is federal interest expense rising so fast?
The debt stock grows with each deficit and the average interest rate on it rises as low coupon securities from before 2022 are refinanced at yields near 4%, so net interest rose 10.5% year over year through June 2026 [1].
What share of tax revenue goes to interest on the debt?
CBO projects interest at 19% of federal revenue in fiscal 2026, up from 9% in 2021 and heading to 26% by 2036 [2].
Sources & References
- [1] U.S. Treasury: Monthly Treasury Statement, June 2026
- [2] House Budget Committee: CBO Baseline, February 2026 (summary of CBO's Budget and Economic Outlook 2026 to 2036)
- [3] American Action Forum: Highlights of CBO's February 2026 Budget and Economic Outlook
- [4] DataPorium Economic Indicators and Macro Data
