Keeping tabs on the finances of the US government is not particularly riveting, but as a US taxpayer, staying informed on where our money (and country’s finances) is going is a way to hold the decision makers, like Congress, accountable. I wrote about this quite a lot in 2023 (here, here and here), when Congress kept debating about the debt ceiling, and it’s time to check back in.

No matter their fate, tariffs were making the story of the US deficit look a little better. 

Through the first months of Fiscal Year 2026 (since October 2025):

• Revenues are up 11% year over year, driven largely by a surge in customs duties from higher tariffs 

• Outlays (spending) totaled $3 trillion, up 2% year-over-year

• Interest payments reached $426 billion, up 8.7% year-over-year

While the Congressional Budget Office (CBO) projects higher tariffs could raise substantial revenue over time, tariff policy has been tangled up in court fights, which adds uncertainty to how durable that revenue stream is.

In February, the CBO released its updated budget outlook:

The deficit is still projected at $1.8T in FY2026, growing to $3.1T by 2036, or 120% of GDP.

But now that we are in a conflict with Iran, the spending picture changes a bit. And thanks to higher oil prices, inflation expectations are higher. The deficit could move higher in the near term from:

• Higher defense/security spending (via supplemental funding)

• Higher interest costs over time if inflation — and thus, interest rates— stay elevated

• Potentially slower global growth if energy prices stay high (which can weigh on tax receipts). 

• Historically, geopolitical stress can boost demand for Treasuries (lower yields). But when the stress is energy-driven, the market also worries about higher inflation — which can push interest rates up.

Bottom line

FY2026 started with a smaller deficit print, but the longer term story is still structural deficits and sizable interest costs. The Iran conflict makes markets more sensitive to that backdrop by jolting oil and gas prices, nudging inflation expectations, and keeping investors on alert.