Interest costs on U.S. debt have reached $3 trillion a day and will jump 8% in 2026, faster than spending, income and GDP.

The federal budget deficit widened to $1.99 trillion, 12% less than the fiscal year 2025 gap of $1.78 trillion, according to Treasury Department data released Friday.

That came as revenues rose 3 percent, to $5.4 trillion, lagging the 6 percent rise in spending, to $7.4 trillion. Social Security and Medicare were the largest items, but third were interest payments on the national debt, surpassing defense and Medicaid spending.

Gross interest costs for fiscal 2026 were $1.36 trillion, according to Treasury data, with an average interest rate of 3.53%. That’s more than double the rate in 2021, just before the Federal Reserve embarked on an aggressive tightening cycle to curb inflation.

Net interest payments rose 8% to $1.05 trillion, outpacing increases in total spending, revenues and GDP. In fact, it exceeds real GDP growth by around 2% as well as nominal GDP growth by around 6%.

Net interest costs for fiscal 2026 translate to about $2.9 billion per day, and the Peter G. Peterson Foundation estimates they are 3.2 percent of GDP, breaking the previous record set in 1991.

With gross U.S. debt at $40 trillion, public debt at 100% of GDP, and borrowing costs rising, interest payments are expected to be the fastest-growing portion of the federal budget in the years to come.

At the same time, the debt burden is increasingly exposed to market volatility, which threatens to further increase interest costs.

Treasury Secretary Scott Bessent issued more short-term debt to finance the deficit and ended long-term bonds.

Today, about a third of the national debt, or more than $10 trillion, is due to mature in the next 12 months, meaning the federal government must refinance it at today’s higher rates.

In February, the Congressional Budget Office projected that annual interest spending on the debt would reach $2.1 trillion by 2036. But then President Donald Trump launched the war in Iran, which sent oil prices and bond yields soaring.

The 10-year Treasury yield is now above 5%, beating CBO forecasts of 4.1% this year, 4.2% in 2027, 4.3% from 2028 to 2031 and 4.4% from 2032 to 2036.

Treasury Department

If bond yields remain about 1 percentage point above CBO estimates, interest costs will reach $2.8 trillion, or 5.9 percent of GDP, by the end of the decade, according to the Committee for a Responsible Federal Budget.

“Higher interest begets more debt, and higher debt begets higher rates and higher interest. Eventually this could all come crashing down,” CRFB President Maya MacGuineas said last month.

“That’s why Washington needs fiscal intervention now, before it’s too late. The president, the Treasury Secretary, and congressional leaders need to understand the seriousness of this problem. There are no easy solutions, and we can’t just wish this problem away.”

But so far there is no sign of much willingness to tackle spending or revenue. Trump has even demanded a $5,000 “dividend” check for Americans if Republicans win the midterm elections and is already handing out “rebates” to millions of Medicare and Affordable Care Act enrollees.

Meanwhile, Bessent argued that further warming of the economy could bring debt under control.

“With 3 percent growth, we can get out of this situation,” he said last month at Southern Methodist University. “We will get to the other side of this Iran conflict, and the underlying economy is very, very strong, and I think it’s accelerating.”

But CBO Director Phillip Swagel said last week that faster economic growth was unlikely to keep U.S. debt under control. Although stronger economic growth would help generate more revenue for the federal government, it’s not that simple.

Federal spending also spurs growth, which leads to higher wages, which in turn affects spending on Social Security benefits, he pointed out. A robust economy also tends to raise interest rates, which increases the interest costs of debt.

Assuming interest rates of 4-5%, Swagel estimated that nominal GDP growth would need to reach 7-8% and real GDP growth would need to reach 5-6% in order to stabilize the debt.

This is more than double the latest real GDP pace of 2.2% in the second quarter. Meanwhile, even Wall Street’s optimistic forecasts call for GDP growth of 2.5% for the full year.

“So growth will help, but it’s probably not plausible that growth alone will stabilize our fiscal trajectory,” he said. “So we end up with changes in revenue and changes in spending, and those are policy choices.”