Federal Spending Is Driving the $2 Trillion Deficit

The federal government ran a $2 trillion deficit through the first 11 months of the fiscal year, according to the Congressional Budget Office (CBO). With one month remaining, Washington is on track to close another fiscal year with a deficit measured in the trillions.

The source of the imbalance is clear in the federal budget data. Tax collections remain close to their historical share of the economy, while federal spending is well above its historical average.

CBO projects federal revenues at 17.5 percent of gross domestic product in 2026, slightly above the 50-year average of 17.3 percent. Federal spending is projected at 23.3 percent of GDP, compared with a 50-year average of 21.2 percent.

Washington is collecting a historically normal amount of revenue. It is spending at a historically elevated level.

Federal Spending Remains Historically High

The difference between current spending and its historical average amounts to hundreds of billions of dollars each year, and the long-term projections show the problem getting worse.

CBO projects federal revenues will reach 17.8 percent of GDP in 2036, still close to their historical average. Federal spending, however, is projected to rise to 24.4 percent of GDP.

The result is a persistent structural deficit. Under CBO's baseline, annual deficits are projected to exceed $3 trillion by 2036, while federal debt held by the public reaches 120 percent of GDP.

Raising taxes would leave the underlying spending trajectory intact. The federal government has operated under substantially different tax rates and tax codes over the past half-century, yet revenues have generally remained within a relatively narrow range as a share of the economy. Today, revenues are already slightly above the 50-year average. Spending is more than two percentage points above its historical average and heading higher.

Closing that gap requires confronting what is driving federal spending.

Entitlements Are Driving the Long-Term Fiscal Problem

Social Security and federal health programs account for a large and growing share of the budget. As those programs become more expensive, they place increasing pressure on a federal government that is already borrowing trillions of dollars.

Social Security illustrates the scale of the challenge. Its trust funds are approaching insolvency, which would trigger substantial benefit reductions under current law. Proposals to eliminate the payroll tax cap would raise trillions of dollars in additional taxes, but would still leave the program facing long-term financial pressures. Reforms that slow benefit growth for higher earners and better target benefits can improve the program's finances without treating higher taxes as the default solution.

Medicare faces similar pressure. Its costs are projected to grow as the population ages and health care spending rises. Reforms such as expanding income-related premiums for higher-income beneficiaries would ask those with greater means to finance more of their Medicare benefits while improving the program's finances.

Medicaid presents a different problem. States have used provider taxes and related financing arrangements to increase federal Medicaid payments while reducing the amount they effectively finance themselves. Congress moved to restrict these practices, and the Centers for Medicare and Medicaid Services is now implementing those reforms. Enforcing those limits can reduce incentives for states to maximize federal payments at the expense of taxpayers elsewhere in the country.

Other programs offer additional opportunities for reform. Obamacare subsidies rise with the cost of subsidized coverage, leaving taxpayers exposed as premiums increase. SNAP recorded $10.1 billion in improper payments in fiscal year 2025. Federal student lending has shifted more higher education costs onto taxpayers while reducing pressure on colleges to control tuition and other expenses.

The programs are different, and the appropriate reforms will be different. What they have in common is their effect on a federal budget that cannot sustain spending growth at its current pace.

Deficit Reduction Requires Spending Reform

Waste, fraud, and improper payments should be addressed wherever they occur, but eliminating them will not be enough to close deficits approaching $2 trillion a year. The largest federal programs have to be part of the discussion.

Congress should pursue reforms that slow the growth of entitlement and mandatory spending, improve program integrity, better target federal benefits, and strengthen incentives to control costs. Those changes can put major programs on firmer financial footing while beginning to narrow the gap between federal spending and revenue.

Without reform, CBO projects spending will continue climbing as a share of the economy even as revenues remain near their historical level. Washington will finance the difference with larger deficits and more debt.

A $2 trillion deficit should not become the normal starting point for the federal budget.

CFE Takeaway

The federal government is not running a $2 trillion deficit because tax revenues have fallen to historically low levels. Revenues are slightly above their 50-year average as a share of the economy, while spending is well above its historical average and projected to climb further. Congress should address that imbalance where it originates by reforming the entitlement and mandatory programs driving long-term federal spending.