Fiscal year 2026 is over, and the books are closed. The Congressional Budget Office puts the deficit just shy of $2 trillion: $218 billion more than the year before, in a year with no pandemic and no recession.

Spending grew twice as fast as revenue. Outlays rose $386 billion to $7.4 trillion. Revenue rose $169 billion to $5.4 trillion. Corporate tax receipts fell 16 percent even as corporate income went up. And net interest on the debt hit $1.14 trillion, now the second-biggest line in the federal budget behind only Social Security. That works out to about $3.1 billion a day.

Host Steve Ellis is joined by TCS Director of Research and Policy Josh Sewell to close the books: what came in, what went out, and who left the tab open. They dig into why the promised tariff windfall turned into roughly $130 billion in refunds after the Supreme Court ruling, why cutting IRS funding costs more in lost collections than it saves, and what higher Treasury rates do to the interest bill. Then a year of receipts: the One Big Beautiful Bill Act’s deficit promises, GAO’s review of DOGE’s “Wall of Receipts,” roughly $4 billion paid to offshore wind developers to walk away from their leases, and the $810 million pocket rescission that closed out the fiscal year.

Plus: Josh turns the tables on Steve. Is this a both-parties problem or a 119th Congress problem? And what belongs on the lame-duck to-do list before the December 11th deadline.

The books on fiscal year 2026 are closed. The tab is still open

Transcript

Announcer (00:02):

Welcome to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. Cut through the partisan rhetoric and talking points for the facts about what’s being talked about, bandied about, and pushed in Washington, brought to you by Taxpayers for Common Sense. And now the host of Budget Watchdog AF, TCS President Steve Ellis.

Steve Ellis (00:40):

Welcome to All American Taxpayers Seeking Common Sense. You’ve made it to the right place. For 30 years, TCS, that’s Taxpayers for Common Sense, has served as an independent, nonpartisan budget watchdog group based in Washington, DC. We believe in fiscal policy for America that is based on facts. We believe in transparency and accountability because no matter where you are in the political spectrum, no one wants to see their tax dollars wasted.

(01:03):

It’s the second week of October 2026. The new fiscal year is two weeks old, and the books on the last one are closed. Last Thursday, the Congressional Budget Office put a number on fiscal year 2026. $2 trillion, that is. That’s how much more Washington spent than it took in in fiscal year 2026, $218 billion more than the year before. Spending grew twice as fast as revenue. And the interest on the debt, just the interest, came to $1.14 trillion. Interest is now the second-biggest line in the federal budget. Only Social Security costs more. Hold my beer, Pentagon.

(01:48):

Meanwhile, Congress is home campaigning. Election Day is three weeks out, and the government is running on a stopgap through December 11th. So today, we close the books. What came in, what went out, and who left the tab open? Josh Sewell keeps the ledger around here. Josh, welcome back to Budget Watchdog AF.

Josh Sewell (02:06):

Hey Steve, happy to be here.

Steve Ellis (02:07):

Josh, CBO’s number is in: $2 trillion. Give us the top line, or right below the top line. How does fiscal year 2026 stack up?

Josh Sewell (02:18):

So the deficit came in just a shade under $2 trillion, $7 billion shy, to be specific. We’re outspending our revenue, frankly. So $7.4 trillion in spending compared to $5.4 trillion in taxes, fees, and tariffs.

Steve Ellis (02:32):

Forgive me for stating the obvious, that’s a big deficit.

Josh Sewell (02:36):

Historically big. It’s actually the third largest on record, just behind fiscal year 2020 and fiscal year 2021, which I’m sure you remember were the height of the COVID pandemic.

Steve Ellis (02:50):

Here’s what jumps out to me. Like you said, no pandemic, no recession, and still a $2 trillion deficit. It’s the highest ever outside a war or recession. Josh, how does a country run deficits like this when times are good?

Josh Sewell (03:08):

They choose the easy road. So for decades, policymakers responded to unexpected emergencies like COVID, the 2008 banking crisis, 9/11, all by increasing spending without at the same time cutting something less critical. Same with expected extra spending, like the wars in Afghanistan and Iraq. Policymakers also expanded Medicare and left Social Security on autopilot for decades, all while ignoring a looming crisis in the trust funds for both those programs. And policymakers have chosen to go to war now with Iran, expand the base military budget, and made disaster response, it’s now what, an unbudgeted $100-plus billion a year program?

Steve Ellis (03:50):

Revenue went up. Revenue went up, Josh. $169 billion more. Why isn’t that good news?

Josh Sewell (03:58):

So the thing with revenue is that it is insufficient. So yes, individual income taxes went up about $188 billion, and payroll taxes for things like Social Security and Medicare were also up $67 billion, but that’s far short of the increase in spending of nearly $400 billion. And it’s the opposite case with corporate taxes, which actually fell by $70 billion.

Steve Ellis (04:23):

That reduction in corporate taxes paid is 16 percent, in a year when corporate income went up. So explain that conundrum, Josh.

Josh Sewell (04:33):

So that is all due to the One Big Beautiful Bill, the tax cut and spending bill passed at the beginning of the current Trump administration. That bill was chock full of business investment tax breaks, especially. So even with increased profits for businesses, revenue from corporate taxes went down. As I think you said when the CBO report came out, what was your quote? “The law’s corporate tax breaks are showing up in substantially lower corporate tax revenue, which means more borrowing to cover the bills.” Unquote. It’s a good quote.

Steve Ellis (05:03):

Yeah, that does sound familiar. And smart. Okay, then there’s tariffs. The pitch was a revenue windfall. What happened there?

Josh Sewell (05:12):

So at best, the expected tariff revenue was a mirage. The administration used dubious legal authority to increase tariffs, and folks who work on this expected that bump in revenue to go away once the lawsuits made their way through the courts.

Steve Ellis (05:28):

And go away it did, with the Supreme Court decision back in February. CBO estimates about $130 billion of the Trump tariffs have been refunded. So, out of the Treasury.

Josh Sewell (05:39):

But that big round of reciprocal tariffs was never going to stick legally. Everybody, I guess, except for the Trump administration knew that. And that’s why we suggested not relying on projections of massive windfalls in making your spending decisions, because anything paid was going to have to be returned. It was just a question of timing. Instead, we suggested then, as we do now, we should focus on real revenue raisers.

Steve Ellis (06:04):

Yeah, and I guess what stings the most is that a lot of that tariff cost was passed on to consumers, but the tariff revenue went back to the importers, which may or may not, mostly not, pass that on to consumers. Okay. Even before looking at raising revenue, how about we just get revenue that we are legally supposed to be collecting? We’ve pointed out many times that cutting IRS funding actually costs more in lost collections than it saves. Josh, how does a cut end up costing money?

Josh Sewell (06:38):

That gap between what taxes are currently owed and what is actually paid, it runs around $700 billion the last time the IRS estimated it. And that tax gap is actually likely to increase with the OBBBA tax cuts falling as they do, predominantly in the laps of various business partnerships and high-net-worth individuals. And both of those are difficult to audit and historically have had higher rates of underpayment.

Steve Ellis (07:07):

Underpayment? Polite term for tax evasion. Not all of the tax gap, but a lot of it.

Josh Sewell (07:14):

I mean, it’s early in the week. I’m a bit more generous and tactful.

Steve Ellis (07:18):

Well, let’s challenge your tact. Let’s talk about the increased spending. Outlays were up $386 billion. Where did it go?

Josh Sewell (07:27):

A little bit everywhere. So Social Security, Medicaid, Medicare, you know, the big three, they were up about $200 billion put together. Defense up $40 billion, but that’s just a down payment so far. But the biggest single item is net interest on the debt. That jumped $115 billion.

Steve Ellis (07:46):

All right, I’m interested in interest, so let’s stay there. $1.14 trillion, up 11 percent in one year. $1.14 trillion is more than Medicare, more than the Pentagon. Only Social Security costs more. Josh, put that in kitchen-table terms.

Josh Sewell (08:04):

Simply, the credit card bill is our second-biggest expense. So interest to service debt we accumulated, that’s the second-biggest program in the government. Not to buy something new, not to pay for anything new, just paying the bill for past spending. And it actually comes to about $3.1 billion every day.

Steve Ellis (08:22):

Continuing the credit card theme a little bit, it’s actually just the interest on the credit card, and we continue to be racking up the bills on that credit card. We’re not paying the principal on that past spending. That $1.1 trillion is just the interest we’re talking about. And borrowing is getting more expensive. The 10-year Treasury note went over 5 percent, the highest since 2002. CBO’s forecast assumed about 4.1 percent. What does that do to the math?

Josh Sewell (08:54):

It makes it more daunting. So a full point, or 1 percent increase, becomes around $1.5 trillion in additional interest over 10 years if it’s sustained. And that number could actually go higher if spending is in fact higher than projected as well, because that spending is added to the principal debt being financed. And since we are, as you pointed out, not paying off our debt, only paying the interest, that principal is going to grow with all the new spending. And also, really importantly, some of that debt is old debt, and that old debt was serviced at interest rates a few points lower than it’s being refinanced at now. So these higher rates will actually take older, lower-cost debt, so to speak, and make it a much higher cost. And that’s a real problem.

Steve Ellis (09:44):

Budget Watchdog AF Faithful, for those of you who are not in the Treasury markets, there are two-year notes, five-year notes, 10-year notes, 20-year bonds, 30-year bonds, and those interest rates are locked in for those bonds. So if you had a 20-year-old bond or a 30-year-old bond that is being refinanced today, it could quite likely be much higher than what we were paying for that same debt for the last 30 years. All right.

(10:13):

As Budget Watchdog AF Faithful know, total federal debt crossed the $40 trillion threshold earlier this year. But that also includes intragovernmental debt, borrowing from ourselves. The debt held by the public, what Uncle Sam owes outside creditors, is now $32.4 trillion, about the size of the whole economy. We talked about crossing the 100 percent level earlier this year. Does it mean anything, or is it just a round number?

Josh Sewell (10:45):

We’ll see. I mean, known unknowns and unknowns we don’t know. There’s some kind of Rumsfeld quote I’m butchering in there. We haven’t seen this level of debt sustained, and so it’s a gamble, and a potentially very pricey one.

Steve Ellis (10:59):

This week’s Wastebasket called it a stroll down memory lane. Let’s start where it starts: the One Big Beautiful Bill Act. In June of last year, the White House called the deficit worries a myth. Now we’ve got a year of receipts. What did they show?

Josh Sewell (11:18):

Echoes of promises around tariffs. I mean, the White House predicted that OBBBA would cut deficits by $2 trillion, pointing to new growth and some spending cuts. The problem is the cuts to things like food assistance were dwarfed by the spending increases for farm subsidies, the Pentagon, and Homeland Security, not to mention the tax cuts, which are the meat of the bill. So it’s really looking like the CBO score at passage, a $4.1 trillion increase in debt, well, that’s more likely the reality.

Steve Ellis (11:50):

So speaking of receipts, DOGE had a whole wall of them. GAO checked that wall. What did they find, Josh?

Josh Sewell (11:59):

A whole lot of nothin’. GAO couldn’t verify most of the savings. They found DOGE didn’t even follow its own formula for calculating savings, so they couldn’t even replicate what DOGE said it had calculated. In fact, it was so bad that one thing they counted was a $1.7 billion defense health IT contract that was canceled. Turns out it wasn’t actually canceled. So not only did you not get the savings, you didn’t even make the cancellation. But frankly, it’s just the latest data point showing that DOGE was all hat and no cattle.

Steve Ellis (12:32):

One more line item for the year in review. Roughly $4 billion to pay wind developers to walk away from offshore leases they paid us for. Josh, what did taxpayers get for that?

Josh Sewell (12:45):

A raw deal. So with energy demand and energy costs on the rise, the administration has been paying companies to stop energy projects. It makes no sense. And that often comes with a side deal to direct some of that money to a fossil fuel project instead. For me, it’s just, so much for all of the above in a quest for energy dominance.

Steve Ellis (13:07):

Yeah, I mean, they’re taking energy off the books, and who knows if they’re really going to make that investment, or if they were already going to make that other investment as well, because these are diversified energy companies. All right. The fiscal year ended the way we talked about last episode, with a pocket rescission. $810 million. We said the method was the story. What’s happened since?

Josh Sewell (13:30):

Once again, the administration is trying to undermine Congress. So with barely a week before the end of the fiscal year in September, the president announced his intention to not spend money on a handful of programs that Congress had funded. Congress was out of town. The fiscal year ended before the timer requiring the funds be spent reached zero, because there is a clock. But this is all just wrapped up in litigation now. And Congress may force the issue when they get back for the lame duck. And even if not, this issue of the president and his administration illegally picking which line items he’ll fund after he signed the bill funding the programs, it’s going to be one of the things that dominates next Congress.

Steve Ellis (14:14):

Budget Watchdog AF Faithful update. GAO said that the pocket rescission broke the Impoundment Control Act, and a lawsuit was filed on the 30th of September. So grab your popcorn. Let’s see what happens.

Josh Sewell (14:29):

So yeah, I think with that, Steve, that early-week optimism, it’s starting to wane for me. But Steve, I just want to go back to your statement on the deficit that we sent out, I guess that was last week or so. Again, quote, “Decades of fiscal irresponsibility got us here, and this Congress chose to make the problem substantially worse.” Unquote. So which is it? Is this a both-parties problem, or is this a 119th Congress problem?

Steve Ellis (14:54):

It’s both. Before President Trump’s term started, the 21st century saw the Republicans hold the White House for 16 years and the Democrats for 16 years. Republicans cut taxes multiple times, and Democrats did some of that too. And both of them spent in a way that would put drunken sailors to shame. And having been in the Coast Guard, I know a thing or two about drunken sailors. But you could also look directly at the 119th Congress. They knew that OBBBA was going to add to deficits. The Congressional Budget Office told them. The Joint Committee on Taxation told them. They also knew that tariffs were not reliable revenue, but they went ahead anyway. And the president is out on the trail promising $5,000 checks to every adult citizen. That would be more than a trillion dollars in deficit spending. Jeez. All right.

(15:44):

Taking back the mic. Josh, last one. Congress comes back after November 3rd with a December 11th deadline. Appropriations, the NDAA. If you’re a taxpayer, what goes on the lame-duck to-do list?

Josh Sewell (16:02):

Well, I’d like to see Congress reassert itself on rescissions. So you can restore the funds subject to the pocket rescission. That’s one thing they could do. They can add a legislative fix, which would force the administration to spend money faster, not just this, but going forward. And you do that in the approps bill that you have to finalize anyway before the continuing resolution we’re running on now is over on December 11th. Maybe you find some fiscal discipline in getting through a full-year CR without a bunch of bad anomalies. But honestly, I kind of just want them to go. I mean, do no additional harm, and clear the desk out for the next guy. A new Congress is a new opportunity. Whoever is in charge, whatever it looks like, it’s a new year. It’ll be a new you for Congress.

Steve Ellis (16:51):

Budget optimism, a signature of Taxpayers for Common Sense, still alive and well. Josh Sewell, thank you.

Josh Sewell (16:59):

Yeah, it’s always good to do this, Steve.

Steve Ellis (17:00):

And there you have it, Budget Watchdog AF Faithful. $2 trillion in a year with no pandemic and no recession, a trillion-dollar interest bill that grows every time we borrow, tax cuts that weren’t paid for, a tariff windfall that went back out the door. The books on fiscal year 2026 are closed, thank God, but the tab is still open. And whoever wins in November, taxpayers are the ones who are going to be paying that tab. This is the frequency. Mark it on your dial, subscribe and share, and know this: Taxpayers for Common Sense has your back, America. We read the bills, we monitor the earmarks, and we highlight the wasteful programs that poorly spend your money and shift long-term risk onto taxpayers. We’ll be back with a new episode soon. I hope you’ll meet us right here to learn more.