In a year in which the US economy exceeded all expectations, the federal deficit nearly doubled, highlighting the dire trajectory of its debt that will likely lead to a series of battles in Congress over upcoming budgets. Specifically the government The deficit reached $2.02 trillion During the fiscal year that ended with the college’s debts being forgiven. This number is clearly higher than the deficit of $1.02 trillion in the previous year, and this gap raises controversy among politicians and experts.
This increase is a clear example of the financial path that has raised warnings from economists, politicians and credit rating agencies. It also helps explain why long-term US Treasury yields have reached high levels not seen since before the global financial crisis The government needs to issue more and more debt To cover the shortfall in revenue compared to spending. Bond yields, falling in line with this trend, surpassed the historic level of 5% on Monday.
From the Republican bench, the explanation is clear: Biden has undertaken a campaign of uncontrolled and destructive spending. Despite reaching an agreement to open the debt ceiling, the reality is that spending needs to do so And they continue to increase day by day for the White House. The North American country requested $106 billion in emergency funds for Israel, Ukraine and the US-Mexico border.
Experts say it is outside the political debate over spending The deficit problem is not at this stage, Rather, it is a serious income problem affecting the world's major economies. Much of this is due to the side effects of faster inflation, a dynamic that is also the subject of bitter debate.
Measured as a percentage of gross domestic product, the adjusted increase in the deficit represents one of the worst three years since 1950, according to JPMorgan. The other two occurred in times of crisis: 2009 and 2020. But fiscal year 2023 It experienced strong economic growth, with more than 3 million people added to American payrolls. It is a paradox that surprised locals and outsiders, because it is not common to see economic activity grow so clearly and deficits soar. These are the three factors that explain this phenomenon.
Student debt forgiveness
The above numbers eliminate the impact of the Biden administration's student loan forgiveness program. This has increased the deficit in 2022 by $379 billion But after the Supreme Court struck down that measure, the Treasury Department was forced to reverse most of the math by reducing the deficit in 2023 by $320 billion. Most fiscal watchdogs pulled the student debt numbers for 2022 and 2023 to get a clearer view of the federal budget.
Tax collapse
There was a $456 billion decline in individual income tax revenues, the largest change in flows in the two years. Part of this is due to a significant reversal in the financial markets from 2021 to 2022. In 2021, the S&P 500 US stock index rose about 27%, while bonds and other assets also rose, leading to increased taxes on profits earned. Obtained. But in 2022, The Standard & Poor's 500 index fell 19%.Bonds also fell, significantly impacting capital gains income and other investment gains accrued this year.
Tax revenues took another hit due to the extension of returns granted to households and businesses in disaster-hit areas. This notably included almost the entire state of California, boosting revenues for one of the top states, according to Policy Center estimates The two parties amounted to about 100,000 millionfrom fiscal year 2023 to fiscal year 2024.
Biden's rescue plan
The White House project, which includes symbolic laws such as “The Law of Chips” and “The Law of Inflation” The Infrastructure Operating Act and several other initiatives included in the “rescue plan” had an impact, although to a lesser extent. In 2021, Biden announced a $1.9 trillion stimulus plan to revive US GDP. Therefore, its impact on the country's deficit is still marginal.
Inflation and rights
Federal benefits paid (U.S. Public System) in 2023 received a cost-of-living adjustment of 8.7%, reflecting higher inflation that peaked in 2022. Social Security 134,000 million increase in deficit And Medicare (public health system) another 92 billion. This data has contributed decisively to raising the spending needs of the North American giant.
Federal Reserve and bonds
In times of low interest rates, the Treasury enjoyed cash transferred from the Fed thanks to interest on its bond portfolio. That era is over, and now the Fed pays huge interest on the cash that banks deposit into its system. If the deposit rate was close to 0% before, it is now well above 5% and well above the average bonds in the Fed's portfolio. This paradigm shift has caused the deficit to increase $106 billion.
On the other hand, increases in interest rates themselves raised yields on debt issued by the United States. The average interest paid by the Treasury on marketable securities rose to more than 3%, the highest level since 2009. Overall, net interest costs were Debts added 184 thousand million dollars to the deficit this year, according to Bloomberg data.
What will happen now?
The deficit is likely to narrow in the fiscal year that began on October 1, thanks in part to the positive performance of financial markets in calendar year 2023, which is expected to narrow. Enhance revenue When the taxes are paid in 2024. California's delayed revenues will also help end the deficit.
But the Fed still likely won't pay the Treasury and the Treasury You will pay increasingly higher interest On your debt for some time. This creates a vicious circle, because higher interest costs only increase the deficit, which requires selling more debt. “What we're really seeing is that $2 trillion is The new normal of disabilitysaid Mark Goldwyn, senior policy director at the Committee for a Responsible Federal Budget, a financial watchdog.
Republican presidential candidates are calling for more tax cuts
It ignites a political battle as key elements of the former president's tax cut package Donald Trump's term expires at the end of 2025. The Biden administration has already begun to push the narrative that those cuts are part of the reason for the high deficit.
Republican presidential candidates are calling for more tax cuts to lift growth rates, saying that would also raise revenues over time. At the same time, we should expect a wider budget deficit Updated long-term forecasts From the Congressional Budget Office and the White House Office of Management and Budget in the spring, to account for the new dynamic of rising borrowing costs.
