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Data: Office of Management and Budget via Fred , U.S. Treasury; Note: 2026 GDP estimated using extrapolated Q3 growth via CFRB; Chart: Emily Peck/Axios The U.S. budget deficit is ballooning, reaching $2 trillion this fiscal year, according to the latest figures. Why it matters: That's the largest deficit since 2021, when the U.S. was climbing out of the pandemic recession. The deficit is being driven in part by the cost of servicing the nation's enormous debt at a time when interest rates are rising due, in part, to the inflationary impact of the Iran war. By the numbers: The federal government paid out $1.052 trillion in net interest on its outstanding debt — all those Treasury notes and bonds we keep writing about — for the 2026 fiscal year, which ended Sept. 30, according to the Treasury data. That's more than what was spent on defense, and was the country's third-biggest outlay after Social Security ($1.67 trillion) and Medicare ($1.07 trillion). Stunning stat: Federal net interest costs in 2026 are estimated at 3.3% of GDP, which would be a record high, according to an estimate from the Committee for a Responsible Federal Budget. Between the lines: This is the price tag for years of borrowing at much higher interest rates — a sort of new normal since inflation started rising in 2021. Rising interest costs add to the deficit, driving still more borrowing and putting additional pressure on the federal budget. The intrigue: The last time interest costs approached these levels was when President George H.W. Bush was in office. At the time, the administration negotiated a bipartisan deficit reduction package that raised taxes, breaking President Bush's infamous "Read my lips, no new taxes" pledge and arguably led to him losing re-election. Still, in the 1990s, the Clinton administration and Congress worked to balance the budget through tax increases and spending cuts. What to watch: There's little appetite for that kind of work from either party, but the so-called bond vigilantes might still press for it.