US Budget Deficits: Spitting Into the Wind
•February 11, 2026
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Why It Matters
Rising interest obligations crowd out private investment and heighten fiscal risk for the U.S. economy. The trajectory signals urgent need for spending reforms or revenue measures to avoid long‑term economic drag.
Key Takeaways
- •Deficits projected above Great Recession levels through 2036
- •Primary deficit shrinking; interest payments rapidly increasing
- •Interest outlays already exceed defense spending in 2026
- •Mandatory spending rising; discretionary share of GDP falling
- •Tariff revenues negligible in closing the budget gap
Pulse Analysis
The Congressional Budget Office’s latest outlook, covering 2026‑2036, shows federal deficits as a share of GDP climbing to levels not seen since the Great Recession. While the 1970s‑80s deficits were already high, today’s gap between revenue and spending sits above those historic peaks and is projected to remain there for the next decade. The report underscores that current law—without policy changes—will keep the deficit trajectory on an upward slope, driven largely by structural spending pressures rather than temporary shocks.
Crucially, the CBO separates the deficit into a shrinking primary shortfall and a rapidly expanding interest bill. As the debt stock grows, net interest payments are set to outpace discretionary outlays, already surpassing defense spending in 2026 and expected to equal all discretionary programs by 2036. Mandatory programs such as Social Security and Medicare continue to swell, while discretionary spending, including defense, is slowly declining as a share of GDP. Tariff revenues, often touted as a fix, remain a negligible slice of total receipts.
The fiscal dynamics have tangible macroeconomic consequences. Higher interest obligations crowd out private investment, dampen growth prospects, and contribute to inflationary pressures, as seen in the recent price spikes. Moreover, large budget deficits fuel a persistent trade imbalance by boosting import demand. Policymakers face a narrowing window to curb the debt spiral through either spending reforms, revenue enhancements, or a combination of both. For investors and businesses, understanding these trends is essential for assessing long‑term fiscal risk and the likely trajectory of U.S. economic policy.
US Budget Deficits: Spitting Into the Wind
I don’t actually expect that writing about US budget deficits and the accumulating federal debt, as I do from time to time, will have any near-term effect. But given the current trajectory, a time will come when decisions need to be made, and having a grip on the underlying dynamics is always a useful starting point. In that spirit of humble and diminished expectations, here are some figures from the just-released Congressional Budget Office report, “The Budget and Economic Outlook: 2026 to 2036” (February 2026).
This figure shows federal deficits as a percent of GDP, going back a half-century to 1976 and projected forward through 2036, based on current law. You can see that the current level fo deficits, and those projected for the next decade, are higher than any years except for the spikes during the Great Recession of 2007-09 and the Covid recession. If you are able to remember the concerns about the size of budget deficits during President Reagan’s term of office in the 1980s, we are comfortably above that level, and projected to stay above it.
The figure also divides the deficit into “primary” and “net interest”: that is, the “primary” deficit is what the deficit would look like if the federal government didn’t need to pay interest on past borrowing. The problem for the future, as you can see, is that the primary deficit is falling, but interest outlays are rising. This pattern creates a bad dynamic, where rising future deficits are being driven by rising interest payments.
I occasionally see some social media boasting about how revenue from the tariffs are going to fix federal deficit problems. Here’s a breakdown of federal revenues. Customs duties are tshow by a dark line near the bottom. You can see that they have definitely risen. This increase is taken into account, and projected into the future, by the deficit estimates given above.
On the spending side, it’s conventional to divide it into what is classified as mandatory, discretionary, and interest payments. Mandatory includes Social Security, federal health care programs, income support programs, retirement for federal employees, and some other items. Discretionary spending is at present about half made up of defense spending, and the other half made up of many smaller programs, including federal spending on education, transportation, veteran’s benefits, and other items. As a share of GDP, discreitional spending is falling over time, while mandatory spending is rising. In 2026, it’s already true that federal interest payments on past borrowign exceed national defense spending. Byt 2036, interest is projected to be more-or-less equal to all discretionary spending.
The costs of excessive federal debt are gradually becoming apparent in various ways. The inflation spike a few years ago was, in part, driven by the spike in federal deficits. The arguments between the Trump administration and the Federal Reserve over interest rate policy are driven, in part, by the recognition that high federal interest payments are crowding out other possibilities for greater spending or tax cuts. Concerns over large US trade deficits are created, in part, because the very large US budget deficits are creating an ongoing surge of US demand for imports. Concerns over slow rates of US economic growth are driven, in part, by concerns that high federal borrowing is crowding out some opportunities for private-sector investment. The current trajectory of federal deficits and debt seems sustainable for awhile longer, in the sense that it doesn’t seem likely to cause a near-term crisis, but that doesn’t make it a desirable path for the US economy to follow.
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