By Andrew Moran
The U.S. budget deficit for fiscal year 2023, running from October to September, is already the third largest on record, as tax revenues fall short of expectations and government spending surges.
In the first 10 months of the current fiscal year, the budget gap topped $1.6 trillion, higher than the $1.375 trillion deficit in all of FY 2022, according to the latest Monthly Treasury Statement.
In July, the U.S. government ran a $221 billion deficit, compared to the consensus estimate of a $109.3 billion shortfall. The Congressional Budget Office (CBO) had accurately forecast a $1.6 trillion fiscal year-to-date deficit.
The 12-month rolling deficit is still north of $2 trillion, while the U.S. government is borrowing $5.3 billion per day.
Last month, tax revenues rose by 2.5 percent to $276 billion, and government spending increased by 3.4 percent to $497 billion, the Treasury Department reported on Aug. 10.
For the fiscal year-to-date, receipts have tumbled 10 percent to roughly $3.7 trillion. Outlays have surged 10 percent to $5.3 trillion, driven by higher spending on Social Security, Medicare, Medicaid, and income security.
Interest Payments Up
Interest payments have also imbibed a large portion of the federal budget. According to the U.S. Treasury, the federal government spent $67 billion on net interest in July. Fiscal year-to-date, gross interest payments have topped $725 billion, up from $589.48 billion from the same time a year ago.
The growth in net interest costs is concerning, says the Peter G. Peterson Foundation, a fiscal sustainability organization.
“As the level of public debt rises, and interest rates remain relatively high, the cost of servicing that debt will rise as well. Interest costs as a percentage of GDP will exceed the previous high of 3.2 percent (which occurred in 1991) before the end of the decade,” the group wrote.
“What’s more, the nation’s tax system will not generate enough revenues to cover spending in those and other areas.”
The latest budget numbers come soon after Fitch Ratings announced a downgrade on “expected fiscal deterioration” concerns over the next three years. The current administration dismissed the decision, saying that it “defies reality.”
But Maya MacGuineas, the president of the Committee for a Responsible Federal Budget (CRFB), argues that the Fitch downgrade “should jolt policymakers awake.”
“Unfortunately, our borrowing will only increase further until we finally decide that enough is enough,” Ms. MacGuineas said in a statement.
“Regardless of one’s opinion on the timing, the core concerns about our fiscal situation are undeniable. We are watching deficits climb, debt soar, and the Social Security and Medicare trust funds near exhaustion.”
The Treasury Department revealed on Aug. 7 that it anticipates borrowing more than $1 trillion in the third quarter, up $274 billion more from the previous estimate in May.
The U.S. government also plans to borrow another $852 billion in the fourth quarter.
“During the July – September 2023 quarter, Treasury expects to borrow $1.007 trillion in privately-held net marketable debt, assuming an end-of-September cash balance of $650 billion. The borrowing estimate is $274 billion higher than announced in May 2023, primarily due to the lower beginning-of-quarter cash balance ($148 billion) and higher end-of-quarter cash balance ($50 billion), as well as projections of lower receipts and higher outlays ($83 billion),” the Treasury stated.
“During the October – December 2023 quarter, Treasury expects to borrow $852 billion in privately-held net marketable debt, assuming an end-of-December cash balance of $750 billion.”
Analysts have questioned the level of demand by domestic and foreign buyers, especially in the wake of the Fitch downgrade. Market observers warn that demand might start drying up in the coming quarters due to the worsening fiscal outlook, Washington’s persistent pressure to borrow, and the Treasury’s immense auction sizes.
As part of efforts to replenish the Treasury General Account (TGA) that was nearly exhausted during the debt ceiling showdown, the Treasury is preparing to increase the auction sizes and, according to experts, might expand T-bill issuance over the next several quarters.
Some market observers wonder how long Washington can keep this up, especially if a recession strikes.
“The US government continues to spend money like a drunken sailor w/ the budget deficit widening to $2.3 trillion. This is occurring when the economy is still in an expansion with the Unemployment Rate near a 54-year low at 3.5%. What happens to the deficit when a recession hits?” said Charlie Bilello, the chief marketing strategist at Creative Planning Investor, on X (nee Twitter).
Despite the official numbers, President Joe Biden has insisted on multiple occasions this year that he has cut the national debt by $1.7 trillion. However, when he took office, the national debt was a little more than $28 trillion. Today, it is close to $33 trillion.
In some speeches, President Biden does reference the budget deficit rather than the national debt, but experts assert that this is still misleading. The main contributing factor to the deficit decline had been the expiring pandemic-era emergency, stimulus, and relief spending.
Overall, when compared with 2019, the fiscal year 2023 deficit is 83.5 percent larger.