The US deficit, estimated at $1.7 trillion, will virtually double in 2023

The U.S. federal budget deficit virtually doubled in fiscal 2023, as declining tax revenues, rising interest rates and persistent demand for expiring pandemic relief benefits strained the country’s public finances.

The latest Treasury Department figures showed a budget deficit of $1.7 trillion in 2023, up from $1.37 trillion in 2022. Make the sacrum appear smaller than it actually was last year, due to an accounting mirage surrounding the student loan forgiveness program proposed by President Biden last year.

The Supreme Court struck down that program this summer and it never went into effect. But the Treasury recorded it as a cost in 2022, ballooning that year’s deficit. After the court blocked the program, the Treasury registered it as savings, artificially lowering this year’s deficit.

The effects of student loans changed the deficit numbers for both 2022 and 2023. When taken into account, the deficit jumped to $2 trillion in 2023 from about $1 trillion in 2022, administration officials confirmed in a call with reporters on Friday.

In other words, the Treasury assumed it saved $300 billion in 2023, when all it really did was eliminate fees that never existed.

Officials downplayed the increase in a news release announcing the total deficit, focusing instead on the strength of the economy and Mr. Biden’s proposals to reduce future deficits, largely by raising taxes on high-income earners and corporations.

“The Biden Administration continues to focus on managing our economy’s transition to healthy, sustainable growth,” Treasury Secretary Janet L. Yellen said in the statement. “As we do so, the President and I are also committed to addressing the challenges to our long-term financial outlook.”

The widening gap between what the government spends and what it earns comes at an uncomfortable moment, as the president looks to a divided Congress for aid for Israel and Ukraine amid concerns about government spending and whether the United States can finance two wars.

Republicans—who had helped run up large budget deficits through tax cuts and spending increases while they were in power—began to insist on deep budget cuts in order to reduce the federal deficit. The fact that the deficit is widening may make it more difficult to convince Congress to approve a series of spending bills that must be passed by next month in order to prevent a government shutdown.

On Friday, the Biden administration formally asked Congress to approve more than $100 billion in emergency spending that includes military aid to Ukraine and Israel, humanitarian aid in those countries and in Gaza, and a host of new efforts to improve U.S. border security.

Ms. Yellen said this week that the United States was able to bear these costs.

“America can certainly stand with Israel and support Israel’s military needs, just as we can and must support Ukraine in its struggle against Russia,” Yellen told Sky News.

Despite growing concern in Washington and on Wall Street about the bleak fiscal trajectory, lawmakers have been unable to come together on plans to enact real spending cuts or tax increases. The House, which has not been able to elect a speaker since Republicans ousted Rep. Kevin McCarthy this month, prevents Congress from passing any legislation or short-term spending packages.

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 topped $33 trillion this year, and financial watchdogs warn that over the next three decades, the interest cost on the debt will be the nation’s largest expenditure. The Congressional Budget Office projects that by 2053, the federal debt held by the public will be low 177% of GDP.

The Treasury Department reported on Friday that net interest on debt rose to a record $659 billion in 2023 from $475 billion last year. The Peterson Foundation, a financial watchdog, noted on Friday that the expected net interest costs of $10.6 trillion over the next decade would be more than double what the United States has spent on interest over the past 20 years.

“I think we’ve reached a critical moment — our finances are completely off track,” Kent Conrad, a 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 both an economic concern and a national security concern.”

This year’s deficit has been exacerbated by several factors, including delays in tax revenue collections due to extreme weather and unexpectedly high costs for some federal programs. For example, the Internal Revenue Service has transferred billions of dollars in tax refunds related to the Employee Retention Credit, a pandemic-era benefit that was recently paused over concerns about fraud.

The Biden administration had hoped to rely on the strengthened IRS, which received $80 billion in new funding as part of the climate law last year, to increase tax collections. Although the agency has had some early success in cracking down on tax evasion, it already faces the prospect of losing about a quarter of that money. A Congressional Budget Office report this week projected that $25 billion would be cut from the IRS budget Adding more than $24 billion to the deficit.

Biden administration officials have sought to place blame for the rising deficit on former President Donald J. Trump, who signed a sweeping package of tax cuts into law in 2017. Analysts agree that those cuts have reduced federal revenues and widened the deficit since they were enacted. Some officials also acknowledge that the deficit was significantly larger last year than the administration had expected. An analysis by the Congressional Budget Office suggests that the unexpected growth was the result of higher borrowing costs and lower tax revenues.

This decline was attributed to lower capital gains tax receipts, increased claims – possibly fraudulent – ​​of the pandemic-era tax credit and the Internal Income Tax. A decision to delay tax filing deadlines for people in California and other states affected by natural disasters.

“The increase in the deficit last year was largely caused by a sharp decline in tax revenues, while spending on programs other than Social Security, Medicare and Medicaid fell slightly as a share of the economy,” said Lael Brainard, who heads the International Monetary Fund. . Biden’s National Economic Council. As budget analysts have warned, Trump’s tax cuts for the wealthy and big corporations are increasing our deficit and national debt.

Mr. Biden has proposed more than $2 trillion in tax increases and other measures to reduce future deficits in his budget this year. He signed two tax increases into law: a minimum tax on large corporations and a tax on stock buybacks. He also increased IRS funding to eliminate tax fraud and generate more revenue. These measures will reduce the deficit from what it would otherwise be, but are not large enough to offset the overall expected growth in the deficit in the coming years.

Some administration officials acknowledge that the president may need to propose more deficit reductions — almost certainly in the form of more tax increases on high-income earners and corporations — in the future if interest costs do not decline.

Top Democrats in Congress say the sharp rise in borrowing costs will encourage them to fight Republican efforts to make permanent provisions of Trump’s tax cuts set to expire in 2025 — or at least provisions that benefit high-income earners and businesses — and to push for plans to take effect. Mr. Biden’s tax policy, which includes a new tax directed at the wealth of billionaires.

“We are in a much different interest rate environment today than we were just a year ago — about a 180 degree difference,” Rep. Brendan F. Boyle of Pennsylvania, the top Democrat on the Budget Committee, said in an interview.

He added: “As we continue to reduce inflation – and all trends are pointing in the right direction – I am confident that you will see interest rates fall, which will give us some relief when it comes to the deficit.” . “But there is no doubt when we look to 2025, and the end of the Trump tax cuts, that we will need more revenue.”

Republicans are increasingly focused on reducing spending on social safety net programs, such as Social Security and Medicare, the largest and most expensive federal programs.

“It’s mandatory spending and entitlement programs that are really driving the debt, and if we don’t address them we’re really going to bankrupt this country,” said Rep. Jody C. Arrington, of Texas, is the Republican chairman of the House Budget Committee. , he said this week.

Despite the relative strength of the US economy at the international level, its long-term financial problems are a source of concern to global economic policymakers.

“Fiscal policy is very loose at this point,” Gita Gopinath, the IMF’s first deputy managing director, said in an interview last week. “We believe this is the right time to stabilize public finances and rebuild reserves.”

Ben Castleman Contributed to reports.