U.S. — The Congressional Budget Office projects the fiscal 2026 federal budget deficit will reach $2.1 trillion, a significant increase from its earlier forecast of $1.9 trillion. This upward revision is driven largely by a sharp decline in tariff revenue following a Supreme Court ruling and rising mandatory spending on entitlement programs.

The agency's February 2026 forecast had projected a fiscal 2026 deficit of $1.9 trillion. The new projection indicates that the shortfall will exceed previous estimates as the fiscal year progresses toward its conclusion.

A primary factor in this deterioration is the collapse of customs revenue after the judiciary intervened in executive trade policy. Tariff and customs-duty collections dropped 60% following the Supreme Court's February 20 ruling that the Trump administration lacked authority to impose tariffs under the International Emergency Economic Powers Act. The Congressional Budget Office estimates tariff and customs-duty collections in 2026 will be $250 billion below earlier projections as a result of this legal reversal.

The impact of the ruling was immediate and severe for federal cash flows. Net customs-duty collections were negative in May 2026 as refunds tied to the Supreme Court ruling began flowing to importers who had paid duties under the invalidated authority. In July 2026, the government issued $36 billion in tariff refunds against $26 billion in gross collections, resulting in a net outflow of $9 billion for the month. Approximately $100 billion has been refunded on duties collected under the invalidated International Emergency Economic Powers Act authority to date.

In response to the loss of emergency powers, the Trump administration shifted to duties under Section 122 of the Trade Act of 1974 after the Supreme Court struck down IEEPA tariffs. However, Section 122 of the Trade Act of 1974 is a temporary authority that expired on July 24, 2026. Following that expiration, the Trump administration shifted to tariffs under Section 301 of the Trade Act of 1974. Previous reporting by PureSource News noted that the administration had also lowered some steel and aluminum tariffs and halted US trade with Spain over defense spending during this period of policy adjustment.

Beyond the loss of trade revenue, mandatory spending continues to expand across major health and retirement programs. Social Security outlays rose $70 billion (5%) in the first 10 months of fiscal 2026. Medicare outlays climbed $66 billion (8%) in the first 10 months of fiscal 2026, while Medicaid outlays rose $45 billion (8%) over the same period. Net interest on the public debt increased by $117 billion (14%) in the first 10 months of fiscal 2026, reflecting the cost of servicing the growing national obligation.

Other areas of discretionary spending showed mixed results. Defense Department military spending rose $39 billion (5%) in the first 10 months of fiscal 2026, and Veterans Affairs outlays rose $34 billion (11%). Department of Housing and Urban Development spending rose $17 billion (43%), and Small Business Administration spending rose $10 billion.

Conversely, Department of Education outlays fell $79 billion (60%) in the first 10 months of fiscal 2026, largely because the Department of Education recorded a $53 billion net reduction in estimated student loan costs in June 2026. This followed a $24 billion increase in estimated student loan costs in July 2025. Environmental Protection Agency outlays dropped $20 billion (59%) in the first 10 months of fiscal 2026 due to lower clean-energy grant disbursements.

The scale of current borrowing has drawn attention from fiscal monitors. The federal government borrowed $1.8 trillion in the first 10 months of fiscal 2026. The deficit totaled $1.8 trillion in the first 10 months of fiscal 2026, which was $169 billion wider than the same period in the previous year.

Adjusting for an August 1 payment deadline that fell on a weekend, the year-to-date deficit gap was $71 billion wider than in fiscal 2025. Total receipts fell $5 billion (1%) in July 2026 compared to the previous year, even as the July 2026 deficit was $431 billion, which is $140 billion higher than in July of the previous year. The federal government borrowed $431 billion in July 2026 alone.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, criticized the trajectory of federal finances. She said the federal government has borrowed an astounding $1.8 trillion this fiscal year, with $431 billion in the month of July alone, equating to nearly $6 billion per day. She noted the unusual nature of such high deficits during a period of economic stability.

She said the nation is on track to surpass $2 trillion in borrowing this fiscal year despite not being in a recession, and that this is not normal.

MacGuineas warned that the current borrowing levels are only part of a larger structural problem. She said such an enormous level of borrowing barely scratches the surface of the nation's fiscal deterioration. She pointed to the approaching total national debt figure as a critical indicator, saying the nation is about to hit the sobering milestone of $40 trillion in gross national debt, and that things are only likely to get worse.

The projection of a $2.1 trillion deficit shows the fiscal impact of judicial decisions on executive trade authority and the persistent growth of mandatory spending. The $250 billion shortfall in tariff revenue demonstrates how legal challenges to administrative actions can directly alter federal revenue streams, forcing reliance on other funding sources or increased borrowing. With net interest costs rising by 14% and major entitlement programs expanding, the budget faces pressure from both reduced discretionary revenue and fixed obligatory outlays.

The expiration of temporary trade authorities like Section 122 of the Trade Act of 1974 creates uncertainty for future customs collections, while expanded corporate investment deductions continue to reduce income tax receipts. As the nation approaches $40 trillion in gross national debt, the combination of these factors suggests that structural deficits may persist regardless of short-term economic conditions. The shift from emergency trade powers to statutory alternatives like Section 301 indicates a continuing evolution in trade policy, but one that has so far failed to replace the revenue lost from the invalidated tariffs.

Why It Matters

The upward revision in the fiscal 2026 deficit projection shows how judicial limits on executive trade authority can rapidly alter federal cash flows. A Supreme Court ruling invalidating tariffs under the International Emergency Economic Powers Act triggered approximately $100 billion in refunds, creating a net outflow that forced increased borrowing. This shift demonstrates that legal challenges to revenue-generating policies can immediately widen deficits even as mandatory spending on entitlement programs continues to rise.