The U.S. government recorded a staggering $1.695 trillion budget deficit in fiscal 2023, representing a significant 23% increase from the previous year. This surge in deficit comes as a result of declining revenues and rising expenditures on Social Security, Medicare, and the high interest costs of the federal debt. In fact, this deficit is the largest since the COVID-19 pandemic-induced deficit of $2.78 trillion in 2021. Notably, it marks a return to ballooning deficits after two consecutive years of decline during President Joe Biden’s initial tenure.
Amidst this fiscal challenge, President Biden has requested an additional $100 billion from Congress to allocate towards foreign aid and security spending. This includes $60 billion for Ukraine, $14 billion for Israel, as well as funding for U.S. border security and the Indo-Pacific region.
The sizeable deficit, surpassing all pre-pandemic deficits, is expected to exacerbate Biden’s ongoing fiscal disputes with Republicans in the House of Representatives. These disagreements triggered concerns over the debt ceiling, leading to a near-default situation in early June. Furthermore, the Republican Party remains divided on leadership, which could complicate negotiations ahead of the next fiscal deadline in mid-November.
However, in September, the final month of the fiscal year, the deficit decreased to $171 billion from $430 billion in September 2022.
Treasury Secretary Janet Yellen and Office of Management and Budget Director Shalanda Young emphasized the significance of President Biden’s enacted and proposed tax reforms in light of the declining revenues. They stated, “Falling revenues are a significant contributor to the 2023 deficit, underscoring the importance of President Biden’s enacted and proposed policies to reform the tax system.”
The fiscal 2023 deficit would have been $321 billion higher if it hadn’t been for the Supreme Court’s ruling that deemed Biden’s student loan forgiveness program unconstitutional. This ruling forced a reversal of a pre-emptive charge against the fiscal 2022 budget results, resulting in an increase in that year’s deficit.
Taking into account these adjustments, last year’s deficit would have been approximately $1 trillion, while this year’s deficit would have approached $2 trillion.
Of note, this deficit puts an abrupt end to two years of declining deficits as COVID-19-related spending diminishes. The peak deficit occurred in fiscal 2020 at $3.13 trillion, driven by the sharpest economic downturn since the 1930s, which severely impacted tax revenues while government spending on unemployment benefits and direct aid surged.
The Congressional Budget Office warns that under current tax and spending legislation, deficits will reach COVID-era levels by the end of the decade. Specifically, they project deficits of approximately $2.13 trillion in 2030 due to increasing interest, health, and pension costs.
Fiscal 2023 revenues declined by $457 billion, a 9% drop compared to the previous fiscal year. This decrease is largely attributed to a reduction in non-withheld individual income tax payments caused by a weaker performance in stocks and other financial assets as interest rates increased.
Other contributing factors to the revenue decline include a $106 billion drop in Federal Reserve earnings due to interest paid on bank reserves consuming portfolio income.
On the other hand, fiscal 2023 outlays decreased by $137 billion, a 2% reduction from the prior year, totaling $6.134 trillion. However, outlays would have been even lower were it not for the significant increases in spending on retirement and healthcare benefits for the elderly, as well as debt servicing costs.
Spending on Social Security rose by 10% to $1.416 trillion, driven by inflation-based cost of living adjustments, while spending on the Medicare program for seniors increased by 4% to $1.022 trillion.
Additionally, interest costs on the formidable federal debt exceeded previous records, rising by 23% to $879 billion. Net interest payments, excluding intragovernmental transfers to trust funds, surged by 39% to $659 billion, also marking a record high.
The proportion of gross interest payments to gross domestic product (GDP) reached 3.28%, the highest since 2001, and the net interest share at 2.45% was the highest since 1998.
The substantial increase in interest costs stems from the surge in interest rates over the past 18 months. The Federal Reserve heightened borrowing costs in an effort to curb inflation. Last fiscal year, the average interest cost on the Treasury’s outstanding debt was 2.97%, up from 2.07% the previous year.
In conclusion, the U.S. faces a daunting fiscal challenge as the budget deficit for fiscal 2023 reaches unprecedented levels. President Biden’s proposed tax reforms and foreign aid initiatives aim to address declining revenues while meeting the nation’s security and international obligations. However, the deficit’s magnitude is likely to intensify the fiscal battles between the President and Republicans in Congress, potentially making negotiations for future fiscal deadlines more arduous.
David Lawder and Dan Burns contributed to this report. Editing by Andrea Ricci.
