TL; DR
- The federal government is expected to run a deficit of approximately $1.9 trillion in fiscal year 2026. This means it will spend $1.9 trillion more than it collects in revenue.
- The national debt now exceeds $39 trillion and is growing faster than the economy. This is a trajectory that both parties agree is unsustainable, even if they disagree on what to do about it.
- Interest payments on that debt are now the second-largest item in the federal budget, surpassing defense spending, and they are projected to keep growing.
- The 2026 midterms will determine who controls Congress and, by extension, what tools get used to address the deficit, with vastly different approaches on the table.
- A growing deficit can affect your everyday life through higher interest rates, more expensive mortgages, and reduced government services.
- There are preventative steps you can take now to protect your finances, regardless of what happens in November.
Wait — What Even Is the Federal Budget Deficit?
Let us start simply. Every year, the federal government takes in money, mostly through income taxes, payroll taxes, and corporate taxes, and spends money on things like Social Security, Medicare, defense, infrastructure, and interest on its existing debt. When it spends more than it brings in, that gap is called the budget deficit. When deficits accumulate year after year, they add up to the national debt.
A useful analogy: imagine the federal government as a household that earns $53,000 a year but spends $70,000. To cover the difference, it puts $17,000 on a credit card. The deficit is this year's charge. The national debt is the total balance that has been building up on that card for decades. (Source: U.S. Treasury Fiscal Data)
For fiscal year 2026, the federal government is expected to collect approximately $5.3 trillion in taxes and spend around $7 trillion, leaving a deficit of $1.7 to $1.9 trillion, depending on which estimate you use. (Source: Everything Policy) (Source: CBO)
How Did We Get Here?
The honest answer is gradually, then all at once.
The national debt crossed $10 trillion during the 2008 financial crisis, $20 trillion in 2017, $30 trillion in 2022, and now sits above $39 trillion in 2026. (Source: Politics News Plus) That's not a Republican problem or a Democratic problem, it's a decades-long bipartisan pattern of spending more than the government takes in, accelerated by major events like the COVID-19 pandemic, the 2008 financial crisis, and the wars in Iraq and Afghanistan.
What has changed more recently is the cost of carrying that debt. For years, interest rates were historically low, which meant borrowing was cheap. Now that rates are higher, the government is paying significantly more just to service what it already owes. Interest payments on the national debt in 2025 reached $970 billion, and they have doubled since 2022. They are now the second-largest spending category in the entire federal budget, behind only Social Security, and ahead of defense. (Source: Peter G. Peterson Foundation)
To put that in human terms: $1 of every $5 in federal revenue is now going toward paying interest on old debt, rather than to building roads, funding schools, or strengthening the safety net. Just servicing the bill. (Source: Bipartisan Policy Center)
Why Does the Election Matter for Any of This?
Congress controls the budget. It decides how much the government spends, what it spends on, and how it raises revenue. The 2026 midterms will determine whether Republicans maintain control of the House and Senate, or whether Democrats claw back enough seats to create a divided government, and those outcomes carry meaningfully different approaches to the deficit.
Here is how both sides are framing it, and what the trade-offs look like:
The Republican Approach: Grow Your Way Out
The Republican position, broadly, is that economic growth driven by tax cuts, deregulation, and domestic energy production will eventually generate enough revenue to bring the deficit under control. The administration's Office of Management and Budget has projected that its policy changes will reduce deficits by $15.8 trillion over the next decade, with the economy growing at an average of 3% per year. (Source: American Action Forum)
Republicans have also pointed to Trump's "One Big Beautiful Bill" — a sweeping tax and spending package — as their flagship deficit-reduction tool, arguing it will ultimately lower consumer costs and stimulate growth.
The trade-off: independent analysts are not as optimistic. The nonpartisan Congressional Budget Office and Joint Committee on Taxation estimate that the One Big Beautiful Bill could increase federal deficits by $3.4 trillion through 2034, even accounting for tariff revenue. (Source: Bipartisan Policy Center) Critics argue that tax cuts without equivalent spending reductions simply widen the gap between what the government collects and what it spends, making the deficit larger, not smaller. The math of "grow your way out" has historically been difficult to achieve at the scale required.
The Democratic Approach: Revenue and Investment
Democrats have argued that the path to fiscal sustainability runs through a combination of higher taxes on corporations and high earners, protecting social programs that provide the economic safety net, and targeted public investment designed to strengthen long-term growth.
Their critique of the current trajectory centers on the distributive impact: that deficit-reduction efforts focused primarily on spending cuts disproportionately affect working families who depend on programs like Medicaid, housing assistance, and food support, while tax cuts have benefited higher-income households and corporations.
The trade-off: higher taxes on businesses can reduce investment, slow hiring, and potentially dampen economic growth, particularly in the short term. And large-scale public investment programs, if they outpace the economy's capacity to absorb them, can add to inflationary pressure. There is no cost-free path here either.
Is There Any Middle Ground?
Interestingly, yes — and it is worth knowing about.
A bipartisan resolution introduced in the House in January 2026 and the Senate in March 2026 calls on Congress to reduce the federal budget deficit to 3% of GDP, a target that economists broadly consider sustainable and achievable. The Committee for a Responsible Federal Budget has noted that the U.S. averaged a 3% deficit between 1970 and 2020, suggesting this is not a radical goal, rather, it is a return to historical norms. (Source: Committee for a Responsible Federal Budget)
There is also a proposed bipartisan Fiscal Commission Act, which would create a 16-member panel — evenly split between both parties — tasked with developing recommendations to stabilize the debt-to-GDP ratio by 2039. Crucially, the commission would be required to report its findings after the 2026 election, meaning November's results will directly shape who gets to act on those recommendations. (Source: Committee for a Responsible Federal Budget)
What Could Actually Happen After November?
If Republicans hold Congress: Expect continued emphasis on tax cuts and deregulation as the primary tools, with spending reductions focused on discretionary programs. The deficit is unlikely to shrink significantly in the near term under this scenario, though proponents argue growth effects will eventually materialize.
If Democrats flip the House or Senate: A divided government would likely produce gridlock on major fiscal legislation, which historically has meant the deficit neither expands dramatically through new spending nor shrinks through aggressive cuts. Some targeted revenue measures might pass; sweeping changes would be harder.
The wildcard everyone is watching: Interest rates. The CBO projects that publicly held debt will rise from 101% of GDP in 2026 to 120% of GDP in 2036 if current laws remain unchanged. As that debt grows, so does the government's borrowing cost — and those costs have a way of trickling down into the rates you pay on mortgages, car loans, and credit cards. (Source: U.S. Bank)
How Does Any of This Actually Affect You?
This is the question that really matters because the deficit can feel like an abstract Washington problem right up until it is not.
Here is the chain of effects that connects the federal deficit to your kitchen table:
When the government borrows heavily, it issues more Treasury bonds to cover the gap. More supply of bonds means investors demand higher yields to absorb them. Higher Treasury yields push up interest rates across the board — on mortgages, car loans, student debt, and credit cards. Research shows that for every 1 percentage point increase in the public debt-to-GDP ratio, long-term interest rates eventually climb by about 4.6 basis points, and the cumulative effect of rising debt since the financial crisis has already added an estimated 3 percentage points to interest rates. (Source: Commons Capital)
In plain terms: a larger deficit tends to make borrowing more expensive for everyone, not just the government.
There is also the crowding-out effect. When the government absorbs a larger share of available capital through borrowing, less is available for private investment in businesses, in housing development, and in infrastructure. The Bipartisan Policy Center estimates that increased government borrowing crowds out productive private investment by about 33 cents per dollar. (Source: Bipartisan Policy Center) Over time, that slows economic growth and limits job creation.
And finally, as interest payments consume a larger share of the federal budget, there is less left over for the programs people rely on, from infrastructure and education to healthcare and retirement security.
What You Can Do Right Now — Regardless of What Happens in November
The good news is that there is quite a lot within your control, even in a high-deficit, higher-rate environment.
Lock in fixed rates where you can. In an environment where deficits are keeping upward pressure on interest rates, locking in a fixed rate on a mortgage or refinancing variable-rate debt can protect you from future rate increases. Variable-rate loans, including many credit cards, home equity lines of credit, and adjustable-rate mortgages, become increasingly expensive if rates stay elevated. (Source: Schwab)
Pay down high-interest, variable-rate debt aggressively. This is especially important right now. With credit card rates running between 21–29% APR in 2026, carrying a balance is extraordinarily costly. The debt avalanche method, which includes directing extra payments toward your highest-interest debt first, is the most efficient path out. (Source: Fidelity)
Maximize tax-advantaged accounts. In a higher-deficit environment, tax increases are one of the tools most likely to be deployed eventually by either party to close the gap. Maximizing contributions to tax-advantaged accounts like 401(k)s, IRAs, and HSAs now can help shield more of your wealth from future tax changes. In 2026, you can contribute up to $24,500 pre-tax to a 401(k) and up to $7,500 combined with traditional and Roth IRAs. (Source: Fidelity)
Build your emergency fund and put it somewhere it earns. In a fiscal environment with genuine long-term uncertainty, an emergency fund is an invaluable asset to have. Building the fund is only part of the strategy - the other is considering where it should be stored. Financial institutions offer a range of savings accounts with various interest rates. It is worth taking the time to compare offers and look at what works best for you.
Talk to a financial advisor about your longer-term plan. The deficit's effects on your finances will play out over years, not months. Your mortgage rate, your investment returns, your retirement income, and your tax burden can all be influenced by how this story unfolds. A financial plan that accounts for a range of scenarios, rather than betting on one political outcome, is your best defense.
The Bottom Line
The federal deficit is one of those topics that can feel like it belongs in a policy textbook rather than your personal financial planning. But the connection is real, and it runs directly through the interest rates you pay, the cost of borrowing, and the long-term stability of the programs many Americans depend on.
The U.S. Government Accountability Office put it plainly in its most recent fiscal health report: publicly held debt is projected to grow more than twice as fast as the economy over the next decade, and the longer action is delayed, the more dramatic the eventual corrections will need to be. (Source: GAO) Both parties know this. What they disagree on is the remedy. And November will have a lot to say about which direction we head.
In the meantime, the most powerful thing you can do is understand the landscape, and make sure your financial plan is built to weather it. We are here to help you do exactly that.
