The 2026 Budget Deadline and Washington’s Fiscal Reckoning

With the holiday season in the rear-view mirror, Congress must confront an unpleasant fiscal reality. The Congressional Budget Office (CBO) estimates that the federal budget deficit for the first quarter of fiscal year (FY) 2026 reached $601 billion—more than $6.5 billion per day—putting the federal government on track for an annual shortfall approaching $2 trillion.

Lawmakers are back in Washington to perform what is perhaps its most important function: funding the federal government. The new year brings the same old problems—and arguably the last real opportunity for meaningful budget reform in the near future.

To avoid a repeat of October’s government-shutdown episode—which left hundreds of thousands of federal workers without pay for 43 days, disrupted federal services, and imposed significant economic costs—Congress faces a two-week deadline and two options.

The first option is to pass all of the appropriations bills by January 30. This option is on the fringes of political feasibility considering the limited time and the high level of dysfunction. Of the twelve individual bills required to fund the government, Congress passed three in November as part of the deal to reopen the government. Negotiating the rest—none of which have cleared both chambers—will require a political determination and genuine compromise.

Absent bicameral agreement on all nine bills by January 30, Congress has a second option to pass agreed-upon appropriations bills in minibuses and adopt a continuing resolution to maintain current funding levels for the rest into the spring, buying time to negotiate.

Yet Congress’s long-standing inability to pass spending bills—let alone on time—is worsening;it now struggles to pass even modest “minibus” packages.

A three-bill minibus cleared the House last week, yet it has drawn bipartisan criticism and has yet to receive a floor vote in the Senate. Passing the other six—including those funding Defense, Labor, and Health and Human Services—will be harder still. As of January 11, congressional leaders had released a separate full-year funding package for Financial Services and General Government and for National Security and the State Department, but that bill still must be voted on by both chambers.

While the Senate and House Appropriations Committees reached agreement on a lower spending target than that of another continuing resolution, these caps alone will not correct an unsettling—let alone unsustainable—budget trajectory. Lawmakers must, therefore, choose structural reform over partisan brinkmanship.

Several spending items should be considered out of bounds. Congress should not tack pandemic-era Medicare extensions—such as telehealth and Hospital-at-Home waivers—onto must-pass appropriations bills. In 2022, the Committee for a Responsible Federal Budget estimated that making telehealth waivers permanent would cost roughly $25 billion over ten years. Even if cost-effective in the long run, such programs should become permanent only after beingcarefully designed, and not be perpetuated endlessly through appropriations riders. And despite Republicans’ leverage in Congress, the minibus that passed the House still contains billions in earmarks (community projects) and keeps spending levels largely intact and “protected” from so-called draconian cuts.

While the GOP currently controls both chambers, midterm projections are not reassuring for the party. Republicans are likely to lose the majority in at least one chamber—and with it, much of their leverage over spending. This appropriations cycle is perhaps Republicans’ final chance to structurally reform discretionary spending; little can be expected under divided government.

Ideally, Republicans must also use this fleeting window to impose fiscal discipline on mandatory spending and the tax code. At minimum, they should allow temporary provisions that have expired to remain expired. For example, enhanced Affordable Care Act premium subsidies are poised to drag on into the future, despite outliving their emergency purpose and costing tens of billions annually. Senate Republicans should block the three-year extension of this Covid-era throwback, especially as Medicaid spending continues to rise, even while enrollment falls.

Beyond ACA subsidies, a host of smaller health provisions is set to expire during this Congress. Republicans should prevent these “temporary” policies from becoming permanent.

CBO’s budget review shows that Medicaid outlays rose about 11 percent in FY 2026 compared to a year prior—far outpacing inflation. In addition to tighter eligibility rules enacted in the 2025 reconciliation act, Republicans should emphasize market-oriented reforms such as refundable tax credits to let households purchase private insurance. Other mandatory spending—including Social Security and Medicare—must also be reformed.

Exercising budget restraint—such as reducing deficits to 3 percent of GDP—would stabilize the national debt before it exceeds its post–World War II record share of the economy. Though the prospect of decisive reform today seems almost a fable, Republicans should nevertheless lead in confronting a soaring national debt, nearly $1 trillion in annual interest costs, and the looming insolvency of the Medicare and Social Security trust funds.