2026 Deficit Rose to $2 Trillion: CBO

Happy Thursday! It's debate night in Michigan, where Republican former Rep. Mike Rogers and Democratic nominee Abdul El-Sayed will face off in their race for a seat that will help decide which party controls the Senate in the next Congress. El-Sayed holds a narrow lead in recent polls, but the Cook Political Report rates the contest a toss-up.\n\nHere's what else we're watching.

Deficit Rose to $2 Trillion for 2026 Fiscal Year: CBO

The federal budget deficit came to $2.0 trillion in the 2026 fiscal year, the Congressional Budget Office estimated Thursday.

The CBO's final projection for the fiscal year, which ended in September, is $218 billion more than the annual deficit recorded last year. Revenues for the year rose by $169 billion, or 3%, but outlays climbed considerably more, up $386 billion, or 6%.

The increase in revenues, which totaled $5.4 trillion, was driven by larger collections of individual income and payroll taxes, which jumped by $255 billion, or 6%. Collections of corporate income taxes fell by $70 billion, or 16%, due in large part to the more generous tax write-offs for investments provided by the 2025 Republican reconciliation bill.

Outlays in fiscal year 2026 were $7.4 trillion, according to the CBO estimate. Spending on the three largest mandatory programs - Social Security, Medicare and Medicaid - rose by $217 billion, or 7%. Driven by a larger total debt and higher interest rates, outlays for net interest on the public debt rose by $115 billion, or 11%. Defense spending rose by $48 billion, or 5%.

Budget experts said the large deficit is unusual, given current economic conditions. "Running $2 trillion deficits in a growing economy with low unemployment and no major emergency situation going on is an unsustainable trend," Shai Akabas of the Bipartisan Policy Center told The Wall Street Journal.

The fiscal hawks at the Concord Coalition repeated their call for the creation of a fiscal commission to tackle the issue. "We finished the fiscal year with debt held by the public as large as our entire economy and net interest on the debt set a record at $1.1 trillion, consuming over 20% of federal tax dollars," Concord Action Executive Director Carolyn Bourdeaux said. "Without decisive and prompt action, the problem is only going to get worse."

Faster Economic Growth Probably Won't Stabilize the Debt, Swagel Says

President Trump told reporters in August that economic growth would "very easily" take care of the $40 trillion national debt. And Treasury Secretary Scott Bessent said last month that he sees faster economic growth as a solution to the problem of a rapidly expanding debt. "With 3% growth, we grow our way out of this," Bessent told an audience at Southern Methodist University. "We'll get to the other side of this Iran conflict, and the underlying economy is very, very strong, and I think reaccelerating."

Congressional Budget Office Director Phillip Swagel poured cold water on that theory Thursday. Speaking at an event at the Federal Reserve Bank of Minneapolis, Swagel said it will take more than growth to fix the debt.

"Growth will help, but it's probably not plausible that growth alone will stabilize our fiscal trajectory," Swagel said.

In theory, faster growth could do the job, Swagel said, but it would require much higher growth rates than Bessent has suggested - or seem realistic. Given Treasury yields of 5%, nominal growth in gross domestic product would likely have to hit 7% to 8% just to stabilize the debt. "It's pretty challenging," Swagel said.

The CBO director did offer some hope, though, saying that although the increase in debt issuance by the Treasury is putting upward pressure on interest rates, the effect has been "small."

"Somehow we're managing, even with interest rates going up," Swagel said. But that could change, he added, saying a "negative shock" could lead to higher rates and a more severe fiscal challenge.

"It's almost like a turbocharger," he said, referring to a potential shock. The resulting increase in interest rates "feeds into the deficit, feeds into the debt, feeds back into interest rates to the economy."

Chart of the Day: An Inflation Election?

Americans have been dealing with inflation for six years straight, and the cumulative effect means that prices are about 29% higher on average than they were in 2020. The price increases have been impossible to ignore, and are even more pronounced for numerous essential goods, including coffee, gasoline, car repair and housing.

As The Wall Street Journal's Owen Tucker-Smith notes, elevated inflation over a sustained period is usually bad news for the political party in power.

"Inflation often punishes incumbents. In 2022 and 2024, high prices were the Democrats' Achilles' heel," he wrote. "Now, a president who made inflation a centerpiece of his political comeback is being asked to answer for the fact that on average, it costs around $50,000 to buy a car and around $60 to fill its tank with gas."

The negative effect may be even worse if voters can blame an incumbent for the ongoing inflation. A recent Journal poll found that 60% of respondents said that Trump's policies have made the economy worse.

Key Democrat Introduces Surprise Medical Billing Reform

The top Democrat on the powerful House Energy and Commerce Committee introduced a bill Thursday to reform a costlier-than-expected part of the law protecting patients from surprise medical bills.

The new legislation from Rep. Frank Pallone of New Jersey aims to overhaul the arbitration process established by the No Surprises Act for resolving disputes between medical providers and insurers.

"The No Surprises Act has been an overwhelming success when it comes to protecting patients from surprise medical bills," Ranking Member Pallone said in a statement. "Today, I'm pleased to say patients no longer receive these outrageous bills, but unfortunately the arbitration process is clearly not working. A few bad actors-largely backed by private equity-are gaming the system, creating backlogs, delaying payments, and driving up premiums."

Pallone's bill, the "Lower Premiums, Faster Payments Act," would replace the current system with a "benchmarking" approach that bases payments on the median in-network rate for a service. The bill would also require that payments be issued within 30 days of a claim being filed.

How we got here: The bipartisan No Surprises Act, which passed in late 2020 and took effect in 2022, established an arbitration system to determine how much providers should be compensated for out of network care. Insurers and providers each submit a proposed rate for a given service, and the arbitrator must choose one of the two numbers, with no middle ground.

Numerous reports - see here, here or here - have detailed how the system has been flooded with filings by a subset of providers and their billing middlemen with claims that resulted in payments far above standard rates. Critics charge that process is leading to higher healthcare costs for employers and consumers. Like Pallone, the Trump administration earlier this year said the arbitration system is being "gamed" and needs to be cleaned up.

Of the 2.5 million disputes submitted last year, about two-thirds came from 10 provider groups, according to a Pallone press release. And arbitrators last year sided with providers in about 85% of cases, according to an August report published in Health Affairs by Georgetown University researchers. They found that the dispute resolution process set up by the No Surprises Act has resulted in $22.4 billion in total costs from 2022 through 2025, including $15.6 billion in awarded payments that exceed in-network rates.

"These escalating costs are driven by the sheer volume of disputes (which rose by 77 percent from 2024 to 2025) and higher payment amounts (which rose by 264 percent from 2024 to 2025)," the report said, adding that the dispute resolution process "is dominated by a handful of provider organizations, many of which are backed by private equity or have other conflicted profit interests."

For their part, doctors and billing companies argue that insurers have repeatedly sought to underpay providers, in some cases offering no response or absurd payments as low as $1, leading arbitrators to rule against them as part of a scheme meant to ultimately have the law changed.

"The only gaming of the system is being done by insurers," Christopher Sheeron, president of Action for Health, a group that represents medical providers, told The New York Times earlier this year. "They are losing in federal arbitration on purpose in an effort to overhaul the law in their favor."

What's next: Pallone is poised to become chair of the Energy and Commerce Committee next year if Democrats win control of the House in November's elections. In that role, he could push his bill - though the House Ways and Means Committee reportedly prefers a different approach to overhauling the No Surprises Act, which could complicate any reform push. But the higher-than-expected costs of the arbitration process are garnering plenty of attention, adding to the likelihood that lawmakers will act.

Fiscal News Roundup

• Trump Says Us Will Not Resume Military Strikes on Iran Before the Nov. 3 Midterm Elections – Associated Press
• U.S. Budget Deficit Jumps to Nearly $2 Trillion – Wall Street Journal
• France Is Veering Toward a Potential Debt Crisis, a Warning to the World – New York Times
• Trump Emails Medicare Enrollees About $90 Payment, Touts His Policies – Washington Post
• Disaster Relief Funding Is Creeping Into Trump's Midterm Rhetoric. Critics Say It Has No Place There – Associated Press
• CBO Chief Warns Growth Solution for US Debt Is Unlikely to Work – Bloomberg
• Frank Pallone Unveils Surprise Billing Overhaul – Punchbowl News
• Top House Democrat Unveils Surprise Medical Billing Overhaul – The Hill
• The Cost of Drugs From Canada Is Set to Soar for Millions of Americans Because of a Federal Rule – Associated Press
• Inflation on Many Everyday Items Was Entirely Due to Tariffs, NY Fed Says – CNBC
• Bipartisan Senate Duo Proposes Filibuster Rules Reform to Fix Gridlock – The Hill
• AI Bailout? Capitol Hill Says Dream On – Punchbowl News

Views and Analysis

• GOP Efforts to Lower Gas Prices Derailed by Republican Infighting – Alexander Bolton, The Hill
• Trump's Vote-Buying Checks Are in the Mail – Ed Kilgore, New York
• What Six Years of Inflation Mean for the Midterms – Owen Tucker-Smith, Wall Street Journal
• 'Medicare for All' Is Back. Now Comes the Hard Part – Elisabeth Rosenthal, KFF Health News
• Healthcare's Risk to the Economy Is Now Too Big to Ignore – Jonathan Levin, Bloomberg
• Default May Be the Tail Risk Haunting French Bonds – Greg Ip, Wall Street Journal
• Trump's Steel Policy Is Working. That's the Problem – Scott Lincicome, Bloomberg
• A Small Value-Added Tax Could Pay for Tariff Repeal – Erica York, Tax Foundation
• 'He's Not Making Sense': How Trump Has Alienated Voters for the GOP – Sabrina Tavernise, New York Times
• No Surprises Act Shielded Patients From Big Medical Bills. Now Its Arbitration System May Be Raising Costs – Samantha Rappaport, et al, CBS News
• How No Surprises Act Disputes Shift Costs to Workers – Noah Tong, Modern Healthcare
• The Supreme Court Is Playing With Fire – Emily Bazelon and David French, New York Times
• 5 Things to Watch for in Thursday's Michigan Debate Showdown – Leland Vittert, The Hill
• Shock Poll: 89 Percent of Boomers Want Higher Taxes on Young People – Robby Soave, The Hill
• A Check Is Not a Plan for Improving the FAA – Vincent E. Bianco III, The Hill
• Measles Is Surging in the US. These Graphics Show How Bad It Has Gotten – Associated Press