US Government interest payments, tax receipts, tariffs, average interest rate on the debt, and Debt-to-GDP ratio in Q1 2026.

By Wolf Richter for WOLF STREET.

The US government fiscal situation and the US Treasury debt are a terrible long-term mess by just about every measure, including the ratio of tax receipts to interest payments, and the Debt-to-GDP ratio. And in May, revenues from tariffs collapsed and turned negative due to refunds being paid out following the Supreme Court ruling in February. But the Q1 mess we’re discussing here does not include the effect of the tariff refunds. That problem will muck things up further in Q2.

And the government’s solution to the mess, supported by the Fed, has been to “let it run hot”: higher nominal economic growth and higher inflation – instead of fiscal responses.

Interest payments by the federal government on its gargantuan Treasury debt dipped by $2 billion in Q1 from the record in Q4, to $305 billion (red in the chart below).

But for the past four quarters combined, interest payments rose by $64 billion (+5.6%) compared to the same period a year earlier, to $1.20 trillion. The $64 billion increase was the result of $2.8 trillion additional debt, softened by lower interest rates on short-term Treasury bills due to the Fed’s rate cuts last year.

Interest payments don’t occur in a vacuum; they occur in the context of tax receipts to pay for them.

Tax receipts by the federal government fell by $20 billion in Q1 from Q4 to $939 billion, including a $14 billion decline in tariff revenues (blue in the chart below).

But for the past four quarters combined, tax receipts rose by $494 billion (+15.6%) from the same period a year earlier, helped by an additional $230 billion in tariffs over the four-quarter period, to $3.67 trillion. That surge of tax receipts is the result of “letting it run hot” and of the tariffs. Current-dollar economic growth and higher inflation cause tax receipts to balloon.

Tariff revenues declined to $76 billion in Q1, from $90 billion in Q4.

Not included in these figures is what happened in May: Refunds of tariffs – due to SCOTUS striking down a portion of the tariffs – exceeded revenues from the remaining tariffs, and net revenues from tariffs were slightly negative (-$22 million). This collapse of the tariff revenues in May and dragging into June will muck up the Q2 figures, and is not included in the Q1 tax receipts here.

For the past 12 months through May, tariffs amounted to $302 billion, per the most recent Monthly Treasury Statement.

The ratio of interest payments to tax receipts worsened to 32.5% in Q1, meaning that interest payments ate up 32.5% of the tax receipts available to pay for them. An ugly situation.

But the prior surge of tax receipts through Q4 had improved the ratio substantially from the worst levels in Q3 2024, when the ratio had marked the worst point (37.5%) since 1996, when the government’s finances were climbing out of the fiscal crisis of the 1980s.

This measure of tax receipts, released by the Bureau of Economic Analysis as part of its second revision of the National Accounts, tracks the receipts that are available to pay for general budget expenditures, such as interest payments, defense spending, government salaries, etc. Excluded are receipts that are not available to pay for general budget expenditures and are not included in the general budget, primarily Social Security and disability contributions that go into Trust Funds, out of which benefits are paid directly to the beneficiaries, and those payments are also not included in the general budget.

The average interest rate on the Treasury debt has been between 3.30% and 3.36% since mid-2024, after more than doubling from early 2022 when the Fed first hiked its policy rates. In May, it ticked up to 3.35%, according to data from the Treasury Department.

New interest rates enter the interest expense only gradually when old Treasury securities mature and are replaced with new Treasury securities at the new interest rate, and when additional Treasury securities are issued at the new interest rates to fund the deficits.

The $6.67 trillion in Treasury bills outstanding (terms between 1 month and 12 months) mature constantly and get refinanced in huge auctions every week, and therefore transmit changes in short-term interest rates quickly to the average interest rate paid on the debt. Interest rates of Treasury bills are largely a result of the Fed’s current and expected policy rates. But that’s only on $6.67 trillion of $39 trillion in total Treasury debt.

The rest of the $39 trillion in Treasury debt is slow to react as changes in interest rates on longer-term debt enter the average interest rate only with newly issued securities to replace maturing securities issued years ago or to fund new deficits.

The ugly Debt-to-GDP ratio edged up a hair to 122.6% in Q1. The ratio shows the burden of the debt on the overall economy, similar to the debt-to-income ratios used to evaluate debt burdens of businesses and households.

The debt ceiling in the first half of 2025 had caused the ratio to drop because Congress prevented the government from issuing more debt to fund the expenditures and deficits that Congress had told the government to fund. The government played along with this absurd but time-honed charade for a while by draining its huge checking account (Treasury General Account) and by executing some “extraordinary measures,” such as temporarily not paying into government pensions funds, instead of borrowing more. So the debt remained unchanged in the first half of 2025. As GDP rose during that time, the debt-to-GDP ratio dipped over those two quarters. But then the magic flipped back to reality, and the debt-to-GDP ratio jumped back into line.

Inflation & nominal economic growth to the rescue? It is obvious that the government and the Federal Reserve have had the intention of letting the economy “run hot” as a way of addressing the fiscal mess.

Inflation has been well above the Fed’s official inflation target for over five years. In May, it accelerated to over 4%, double the 2% inflation target, and there are still Fed officials talking about rate cuts, though those are unlikely now.

Even the core inflation rate – which exclude the energy price spike and food – has surged to 3.4% on an annual basis, according to the Fed-favored core PCE price index. The six-month core PCE price index has accelerated to 4.1%, the worst since June 2023. Inflation in core services other than housing was a big driver of that acceleration as inflation spreads into the broader economy. But this is not new: Core inflation has been accelerating since May 2025.

And yet, only 9 of the 19 FOMC members expected a rate hike this year, according to the dot plot of the Fed meeting two weeks ago. Warsh didn’t submit his expectations, while 8 expected no change in policy rates, and 1 expected a rate cut this year, despite this acceleration in core inflation measures. And this was the most hawkish Fed meeting in a while!

Clearly, the Fed is not interested in bringing inflation down to 2.0%. It got seriously nervous when core PCE inflation dropped below 3% in 2024 and started cutting rates. And it’s getting a little nervous when recent trends of core PCE inflation – such as the 6-month rate – go over 4%. It is obvious that the Fed does not want to trigger a recession to push inflation down to 2%. A recession would make the US fiscal mess much worse.

A rapidly growing economy generates more taxable income and substantially higher tax receipts – both from corporate and individual taxpayers. Growing asset prices generate capital-gains taxes.

Those capital gains tax receipts can plunge when asset prices drop, such as in 2022, which caused the drop in tax receipts in the first half of 2023, when it came time to pay capital gains taxes for 2022.

In 2025 there was the surge of tariff revenues. Manufacturing in the US generates large amounts of tax revenues, including from the secondary and tertiary effects of manufacturing, far outrunning any decline in tariff revenues that might come along with producing more in the US.

So that’s the game plan to address the fiscal mess: Higher nominal economic growth (in Q1, nominal GDP grew by 5.8% annual rate, after 4.2% in Q4 and 8.3% in Q3), more manufacturing in the US, and higher inflation in a moderate range, such as between 3-5%. Higher nominal economic growth and higher inflation can be effective in slowly reducing the burden of the debt on the economy.

Meanwhile, neither Congress nor the White House are making any efforts to address the root cause of the fiscal mess: over two decades of reckless fiscal policies.

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