The United States’ federal budget deficit doubled in the 2023 fiscal year due to slumping tax receipts, rising interest rates, and continued demand for expiring pandemic relief benefits. The latest Treasury Department figures indicate a budget deficit of $1.7 trillion in 2023, up from $1.37 trillion in 2022. However, these numbers appear smaller when compared to the previous year due to an accounting mirage related to a student loan forgiveness program proposed by President Biden. Despite the program being struck down by the Supreme Court, the Treasury recorded it as both a cost and savings, which artificially manipulated the deficit figures for both years. When factoring out these effects, the deficit actually increased to $2 trillion in 2023 from about $1 trillion in 2022.
The Biden administration downplayed the increase in the deficit and instead focused on the strength of the economy and the president’s proposals to reduce future deficits by raising taxes on high earners and corporations. Treasury Secretary Janet L. Yellen emphasized the administration’s commitment to addressing long-term fiscal challenges and steering the economy toward healthy and sustainable growth.
The widening budget deficit poses challenges as the president seeks aid for Israel and Ukraine from a divided Congress. Republicans, who contributed to large budget deficits through tax cuts and increased spending during their time in power, now insist on deep budget cuts to reduce the federal deficit. The widening deficit may make it more difficult to reach a consensus on spending bills that must be passed to prevent a government shutdown.
To address these concerns, the Biden administration has asked Congress to approve over $100 billion in emergency spending, including military aid to Ukraine and Israel, humanitarian assistance, and efforts to improve border security. Treasury Secretary Yellen stated that the United States can afford these costs. However, economists and deficit hawks warn that the current borrowing path is unsustainable, especially if interest rates remain high for an extended period of time.
The national debt has surpassed $33 trillion this year, and fiscal watchdogs predict that interest on the debt will become the largest government expenditure within the next three decades. The Congressional Budget Office estimates that by 2053, the federal debt held by the public will reach 177% of the gross domestic product. Net interest on the debt reached a record $659 billion in 2023, compared to $475 billion the previous year. The projected net interest costs of $10.6 trillion over the next decade is more than double the interest spent over the past 20 years.
Lawmakers have been unable to agree on meaningful spending cuts or tax increases to address the rising deficits. The Biden administration has proposed more than $2 trillion in tax increases and other measures to reduce future deficits, but it may need to propose even more deficit reduction measures, such as additional tax increases on high earners and corporations, in the future if interest costs do not decrease.
Top Democrats in Congress plan to fight against Republican efforts to make certain provisions of former President Donald J. Trump’s tax cuts permanent and to enact President Biden’s tax plans. Republicans are focused on curbing spending on social safety net programs, such as Social Security and Medicare.
The rising deficits are a matter of concern for global economic policymakers, as fiscal policy is deemed too loose at the moment. The International Monetary Fund suggests that fiscal consolidation is necessary to rebuild financial buffers.
