The U.S. Treasury Department released its latest fiscal data on Wednesday (August 12), showing that the monthly budget deficit has climbed to its highest level in more than five years due to a combination of factors, including soaring healthcare spending and persistently high federal debt interest burdens. The cumulative deficit for the first ten months of the fiscal year also increased in tandem. High debt interest costs are further squeezing fiscal space, and the current fiscal situation is deeply intertwined with the Federal Reserve's monetary policy, potentially causing spillover effects on global capital markets.

The deficit widened significantly in a single month, with multiple expenditures pushing up the fiscal gap.

According to data released by the Treasury Department, the U.S. budget deficit reached $432.3 billion in July, an increase of approximately 48% year-on-year, marking the highest monthly deficit level since March 2021. In the first ten months of fiscal year 2026, the cumulative U.S. fiscal deficit has already approached $1.8 trillion, exceeding the figure for the same period in 2025. The primary factor contributing to the sharp increase in the July deficit was the Medicare program, which saw spending reach $174 billion that month , a significant increase from $103 billion in June. Cumulative Medicare spending for the fiscal year has now reached $955 billion, making it the largest single expenditure item for the government in July, exceeding Social Security spending of $141 billion. Net interest payments on federal debt also reached $104 billion. In addition to routine public spending, two one-off factors further amplified the fiscal pressure. Tariff refunds caused a $33 billion fiscal loss, as the government continued to process tax refunds after the U.S. Supreme Court ruled some tariff measures non-compliant. Simultaneously, because the first day of the month was a non-working day, various welfare subsidies, supplemental insurance income, and Medicare-related payments were forced to be disbursed in advance, resulting in an additional $99 billion in spending, further widening the fiscal deficit for the month.

The burden of debt interest payments continues to increase, and fiscal and monetary policies are intertwined.

Looking at the overall structure of this fiscal year, debt-related principal and interest payments account for the second largest share of total government spending, after Social Security and Medicare. Currently, the total size of the US federal debt is $39.9 trillion , with $32.1 trillion held by the public. Total interest payments so far this fiscal year have reached $1.17 trillion, compared to $1.01 trillion in the same period last year. After deducting the interest income received by the Treasury, net interest payments reached $931 billion. Trump has long called on the Federal Reserve to lower benchmark interest rates, hoping to reduce the interest costs of the massive debt. After his nominee, Kevin Warsh, took office as Fed chairman in May, Trump stopped publicly criticizing the Fed. For a long time, the mainstream market expectation was that the Fed would raise interest rates to address inflation exceeding the 2% target level for five consecutive years. However, recent inflation data has eased, and non-farm payroll data has been weak, cooling market expectations for interest rate hikes. However, futures market participants have not priced in interest rate cuts over the next five years, implying that the high-interest-rate environment may continue for a long time, and the US Treasury will continue to bear heavy interest payment pressure.

Conclusion

In summary, the US fiscal situation is facing multiple pressures from rigid spending on people's livelihoods, debt interest payments, and one-off events. The sharp increase in the monthly deficit is not entirely due to temporary factors. The direction of monetary policy directly determines the level of debt interest rates. Fiscal and monetary policies are mutually constraining, and the risk of further fiscal deterioration will continue to disrupt global asset price trends.