The United States government reported a staggering budget deficit of $1.695 trillion for the fiscal year 2023, marking a 23 percent increase from the previous year. This fiscal deficit is the most substantial since the $2.78 trillion deficit observed in 2021, during the peak of the COVID-19 pandemic. It signifies a return to a significant increase in deficits after two consecutive years of decline during President Joe Biden’s initial tenure in office.
This surge in the deficit coincides with President Biden’s request to Congress for an additional $100 billion in foreign aid and security spending, which includes $60 billion allocated for Ukraine, $14 billion for Israel, and funding for U.S. border security and the Indo-Pacific region.
The magnitude of this deficit, surpassing all pre-COVID deficits, is expected to fuel fiscal confrontations between President Biden and Republican members of the House of Representatives. The latter has been advocating for spending reductions, a stance that previously brought the U.S. close to a default on its debt ceiling in early June.
September, the final month of the fiscal year, witnessed a decrease in the deficit to $171 billion from the $430 billion reported in September 2022.
Declining revenues have played a significant role in the 2023 deficit, underscoring the importance of President Biden’s policies aimed at tax system reform, as noted in a joint statement by Treasury Secretary Janet Yellen and Office of Management and Budget Director Shalanda Young.
It’s worth noting that the fiscal 2023 deficit would have been $321 billion larger if not for a Supreme Court ruling that declared President Biden’s student loan forgiveness program unconstitutional. This ruling led to a retroactive adjustment to the fiscal 2022 budget results, reducing that year’s deficit.
When accounting for these adjustments, last year’s deficit would have been closer to $1 trillion, and this year’s closer to $2 trillion, according to a Treasury official.
The fiscal 2023 deficit also brings with it record-high interest costs. Interest on the federal debt surged by 23 percent to $879 billion, establishing a new record. This significant rise in interest costs can be attributed to the more than $33 trillion federal debt. Net interest payments, excluding intragovernmental transfers to trust funds, increased by 39 percent to $659 billion, also marking a record. The share of gross interest payments relative to gross domestic product reached 3.28 percent, the highest since 2001, with the net share at 2.45 percent, the highest since 1998.
Interest rates experienced a considerable increase over the last year and a half as the Federal Reserve raised borrowing costs to combat inflation. The average interest cost on the Treasury’s outstanding debt was 2.97 percent in the previous fiscal year, up from 2.07 percent in the preceding year.
This deficit serves as a significant departure from the declining deficits observed during the initial years of President Biden’s term, primarily due to the waning of COVID-19-related expenditures. However, the Congressional Budget Office has cautioned that based on existing tax and spending legislation, deficits in the U.S. are anticipated to approach COVID-era levels by the end of the decade, with projections reaching approximately $2.13 trillion in 2030, driven by mounting interest costs, healthcare, and pension obligations.
During the fiscal year 2023, total revenues saw a $457 billion decline, representing a 9 percent drop from fiscal 2022, largely due to reduced non-withheld individual income tax payments stemming from a less favorable performance in the stock market and other financial assets as interest rates climbed. Additionally, a $106 billion decrease in Federal Reserve earnings occurred due to interest paid on bank reserves eroding portfolio income.
Fiscal outlays for 2023 were reduced by $137 billion, a 2 percent decrease from the previous year, amounting to $6.134 trillion. The outlays would have been more modest if not for significant increases in spending on retirement and healthcare benefits for the elderly, as well as debt service costs. Specifically, Social Security spending rose by 10 percent to $1.416 trillion due to cost of living adjustments for inflation, while Medicare senior healthcare program spending increased by 4 percent to $1.022 trillion.
This surge in the deficit and interest costs presents fiscal challenges for the Biden administration and the political landscape, with fiscal negotiations anticipated to intensify as the U.S. approaches a new fiscal deadline in mid-November.
