America’s federal budget deficit virtually doubled in fiscal year 2023 as falling tax revenues, rising interest rates and continued demand for expiring pandemic relief benefits weighed on the country’s finances.
The latest Treasury figures showed a budget deficit of $1.7 trillion in 2023, up from $1.37 trillion in 2022. These numbers make the deficit appear smaller than it actually was last year, due to an accounting mirage related to a student loan forgiveness program President Biden proposed last year.
That program was struck down by the Supreme Court this summer and never went into effect. However, the Treasury recorded this as a cost in 2022, increasing that year’s deficit. After the court struck down the program, the Treasury Department recorded it as savings, artificially reducing this year’s deficit.
That impact on student loans changed the deficit numbers for 2022 and 2023. When factored out, the deficit jumped from about $1 trillion in 2022 to $2 trillion in 2023, administration officials confirmed in a call with reporters Friday.
In other words, the Treasury assumed it was saving $300 billion in 2023, when in reality it was simply reversing a burden that never existed.
Officials downplayed the increase in a news release announcing the deficit totals, focusing instead on the strength of the economy and Mr. Biden’s proposals to reduce future deficits, mostly through tax increases on high earners and corporations.
“The Biden administration remains focused on managing our economy’s transition to healthy and sustainable growth,” Treasury Secretary Janet L. Yellen said in the release. “As we do that, the President and I are also committed to addressing challenges to our long-term fiscal outlook.”
The growing gap between the government’s spending and its revenue comes at an awkward time, as the president hopes for help for Israel and Ukraine from a divided Congress and worries about government spending and whether the United States can afford it to finance two wars.
Republicans — who helped run up large budget deficits with tax cuts and increased spending during their time in office — have begun insisting on deep budget cuts to reduce the federal deficit. The fact that the deficit widened could make it even more difficult to get Congress to agree on a series of spending bills that must be passed next month to prevent a government shutdown.
On Friday, Mr. Biden’s administration formally asked Congress to approve more than $100 billion in emergency spending, including military aid to Ukraine and Israel, humanitarian assistance in those countries and the Gaza Strip, and a range of new improvement efforts American border security.
Ms. Yellen said this week that the United States has the ability to absorb those costs.
“America can certainly afford to stand with Israel and support Israel’s military needs, and we can and must also support Ukraine in its fight against Russia,” Ms Yellen told Sky News.
Despite growing concerns in Washington and on Wall Street over the dismal budget outlook, lawmakers have failed to agree on plans for significant spending cuts or tax increases. Dysfunction in the House, which has been unable to elect a speaker since Republicans ousted Rep. Kevin McCarthy this month, is preventing Congress from passing legislation or short-term spending packages.
Economists and deficit advocates warn that the current credit path is unsustainable, especially if interest rates remain high for an extended period of time.
The national debt topped $33 trillion this year, and financial watchdogs warn that interest on the debt will be the country’s biggest expense over the next three decades. The Congressional Budget Office predicts that federal debt held by the public will amount to 177 percent of gross domestic product by 2053.
The Treasury Department reported Friday that net interest on the debt rose to a record $659 billion in 2023 from $475 billion last year. The Peterson Foundation, a financial watchdog, noted Friday that the projected $10.6 trillion in net interest costs over the next decade would be more than double U.S. interest spending over the past 20 years.
“I believe we have reached a pivotal moment — our fiscal affairs are completely out of whack,” Kent Conrad, senior fellow at the Bipartisan Policy Center, told lawmakers Thursday at a congressional hearing on the need for a new finance commission. “Rising deficits and debt are an economic and a national security problem.”
Deficits have worsened this year due to many factors, including delays in tax revenue collection due to extreme weather and higher-than-expected costs of certain federal programs. For example, the Internal Revenue Service has provided billions of dollars in tax refunds related to the Employee Retention Credit, a pandemic-era benefit that was recently suspended due to fraud concerns.
The Biden administration hopes to lean on a strengthened IRS, which received $80 billion in new funding as part of last year’s climate law, to boost tax revenue. Although the authority has already achieved initial success in combating tax evasion, it is already at risk of losing around a quarter of these funds. A Congressional Budget Office report this week projected that a $25 billion cut to the IRS budget would increase the deficit by more than $24 billion.
Biden administration officials have tried to blame the rising deficits on former President Donald J. Trump, who signed a sweeping tax cut package in 2017. Those cuts have led to a decline in federal revenues and widening deficits since they took effect, analysts agree. Some officials also admit that the deficit grew significantly more last year than the government had predicted. An analysis by the Congressional Budget Office suggests that the unexpected growth was due to rising borrowing costs and a decline in tax revenues.
This decline is due to declining capital gains tax revenues, increased – potentially fraudulent – claims due to a pandemic-era tax break and an I.R.S. Decision to delay tax filing deadlines for people in California and other states affected by natural disasters.
“Last year’s increase in the deficit was largely driven by a sharp decline in tax revenues, while spending on programs other than Social Security, Medicare and Medicaid actually fell slightly relative to the economy,” said Lael Brainard, head of Mr. Biden’s National Economic Council . “As budget analysts warned, Trump tax cuts for the rich and big corporations are increasing the deficit and our national debt.”
Mr. Biden proposed more than $2 trillion in tax hikes and other measures this year to reduce future deficits in his budget. He signed two tax increases into law: a minimum tax on large corporations and a tax on stock buybacks. He also increased funding for the IRS to crack down on tax fraud and raise more revenue. These measures will reduce the deficit to the level it could have been, but are not large enough to offset the overall projected increase in deficits in the coming years.
Some administration officials acknowledge that the president may have to propose even greater deficit reduction in the future – almost certainly in the form of further tax increases on high earners and corporations – if interest costs do not fall.
Leading Democrats in Congress say the sharp rise in borrowing costs will encourage them to fight Republican efforts to make permanent the provisions of Mr. Trump’s tax cuts that expire in 2025 – or at least the provisions that benefit high earners and corporations – and pushing to implement Mr. Biden’s tax plans, which include a new tax on billionaires’ wealth.
“We are in a very different interest rate environment today than we were a year ago — about 180 degrees different,” Rep. Brendan F. Boyle of Pennsylvania, the top Democrat on the Budget Committee, said in an interview.
“As we continue to bring inflation down – and all trends are pointing in the right direction – I am confident that interest rates will come down, which will give us some relief on deficits,” he added. “But as we look toward 2025 and the expiration of the Trump tax cuts, there is no question that we need more revenue.”
Republicans are increasingly focused on curbing spending on social insurance programs such as Social Security and Medicare, which are the largest and most expensive federal programs.
“It’s the mandatory spending and the entitlement programs that are really driving the debt, and if we don’t address them, we’re really going to bankrupt this country,” Rep. Jodey C. Arrington of Texas, the Republican chairman of the House Budget Committee, said this week.
Despite the relative strength of the U.S. economy compared internationally, its long-term fiscal problems are a concern for global economic policymakers.
“Fiscal policy is too loose right now,” Gita Gopinath, the first deputy managing director of the International Monetary Fund, said in an interview last week. “We believe this is the time for fiscal consolidation and rebuilding buffers.”
Ben Casselman contributed reporting.
Source : www.nytimes.com