US starts fiscal 2027 with record $404 billion budget deficit: Why customs revenue fell 39% despite Trump's new tariffs

US government collected significantly less revenue from customs duties in October even as federal spending climbed to a record for the month, which pushed the budget deficit to $404 billion at the start of fiscal 2027 and the shortfall increased 42% from a year earlier.

Net customs collections fell 39% to $19.2 billion from $31.3 billion in October 2025 and overall federal receipts declined 9% to $369 billion. Government outlays rose 12% to $773 billion, an increase of $84 billion from the previous year.

The Treasury Department released the figures Thursday. The October deficit was a record for the month and $120 billion higher than the same period last year, as per Reuters report.

US Customs Revenue Falls 39% as Trump Administration Faces Tariff Refunds

The decline in customs collections comes as the Trump administration tries to restore tariff revenue following a major setback earlier this year.

In February, the Supreme Court overturned a large portion of Trump's tariffs, forcing the government to refund about $166 billion in duties collected under the International Emergency Economic Powers Act.

As of November 5, US Customs and Border Protection had sent about $128.4 billion in refund payments, including interest, to the Treasury for disbursement, according to Bloomberg report.

Then the administration subsequently introduced temporary global tariffs while preparing additional duties under Section 301 of the Trade Act of 1974.

Other measures followed. Tariffs targeting goods linked to forced labor from more than 60 economies took effect over the summer, while Trump recently imposed duties on billions of dollars worth of Canadian imports using a previously unused tariff authority.

The Treasury expects customs duties to generate $464 billion in fiscal 2027. However, that projection is higher than the current pace of collections under the tariffs in place.

US Government Spending Reaches Record $773 Billion as Military Outlays Jump

The decline in revenue was accompanied by a sharp increase in federal spending, with several major categories contributing to the higher October bill.

Military spending increased by $28 billion, or 30%, partly because of a payment to military trust funds that had been delayed by last year's government shutdown, as per Reuters. Higher spending on operations, maintenance and procurement also contributed.

Department of Agriculture spending rose by $14 billion, or 80%, largely because of farm relief payments.

Interest payments on federal debt added further pressure. Gross interest costs climbed $11 billion, or 11%, from October 2025 to $115 billion.

Higher healthcare spending also contributed to the increase in government outlays, according to the Treasury figures.

US Budget Deficit Could Widen to $2.2 Trillion in Fiscal 2027

October's shortfall follows another difficult year for federal finances. The US recorded a $1.99 trillion deficit in fiscal 2026, the largest annual budget gap in five years.

The shortfall amounted to 6.2% of gross domestic product, up from 5.8% in fiscal 2025. The Treasury now expects the deficit to increase slightly to approximately $2.2 trillion in fiscal 2027.

Treasury Secretary Scott Bessent has set a target of bringing the annual deficit down to 3% of GDP. However, he has not outlined specific plans for reducing government spending or increasing revenue beyond higher tariffs.

Bessent has argued that strong economic growth could help the government reduce the deficit. He has said that if the US continued growing at the pace recorded in the third quarter of 2026, the federal government could grow its way out of its current fiscal gap.

Most economists have dismissed that argument, saying the economy would need to sustain growth of more than 8% to meaningfully reduce the deficit.

Meanwhile, Trump has floated additional government spending, including a proposed $350 billion increase in defense spending.

October Budget Deficit Rises to $285 Billion After Calendar Adjustments

The reported $404 billion deficit also reflects the timing of certain government payments.

The Treasury said November benefit payments were shifted into October in both fiscal years, reported Reuters. After adjusting for these calendar-related changes, the October deficit would have been $285 billion.

Even after the adjustment, the shortfall was $94 billion, or 49%, higher than in October 2025.