July 12, 2024

US Federal Budget Deficit Set to Double in 2023

The U.S. federal deficit is on track to nearly double this year, almost doubling this year due to a complex interplay of factors, including higher interest rates and diminished tax revenue. 

Projections from the Committee for a Responsible Federal Budget (CRFB), a nonpartisan advocate for deficit reduction, indicate that the fiscal year ending on September 30, 2023, could witness the deficit mushroom from last year’s $1 trillion to a staggering $2 trillion.

Marc Goldwein, a senior policy director at CRFB, cautioned, “This would be the highest deficit we’ve ever had outside of a recession or national emergency,” in an exclusive interview with FOX Business.

Several factors contribute to this substantial increase, including surging inflation, elevated interest payments, and a decline in tax receipts. It follows a record decrease in the budget shortfall in the previous year, when the deficit dropped from nearly $3 trillion to approximately $1 trillion after the government’s unprecedented spending in response to the COVID-19 pandemic in 2020 and 2021.

In 2022, the government saw a boost in capital gains revenue as Americans capitalized on a booming stock market, selling stocks and realizing substantial gains. However, the market has been less favorable since then, resulting in a sharp decline in capital gains tax revenue compared to the previous year. 

The Treasury Department also benefited from increased general tax collection due to surging inflation, effectively raising nominal incomes for millions of households. While the IRS indexes the tax code to inflation, it does so with a lag, resulting in higher federal income tax brackets and standard deductions coming into effect at the start of 2023, allowing more Americans to shield their income from taxation.

Inflation indexing also impacts Social Security and Medicare, increasing government spending on these programs compared to fiscal year 2022.

“What’s mostly happening is that we are returning to the new normal after an unusually low 2022 deficit,” explains Goldwein. “That’s quite alarming because the pre-pandemic normal was $1 trillion, and back in 2015, it was $500 billion. In less than a decade, we’ve gone from $500 billion being the norm to $1 trillion and now $2 trillion.

It’s important to note that these figures exclude President Biden’s $400 billion student loan cancellation plan, which was included in the official 2022 deficit but was never implemented due to a Supreme Court ruling against the policy.

These massive spending imbalances underscore the impact high and rising debt can have on everyday Americans. High deficits can stoke inflation, while soaring debt can push up interest rates, causing ripple effects.

Goldwein noted, “Mortgage rates are as high as they’ve been since well before the financial crisis. Car loan rates, student loan rates, credit card rates, they’re all really high.” 

As lawmakers scramble to avoid a government shutdown, the White House urges Congress to pass a short-term funding measure, known as a continuing resolution, to maintain the government’s financial stability. At the same time, negotiations continue on longer-term funding bills.

Senate Majority Leader Chuck Schumer and House Speaker Kevin McCarthy have expressed their desire to pass a short-term deal to keep the government operational. However, the House Freedom Caucus, a group of House Republicans, demands concessions as part of the continuing resolution, intensifying the potential for last-minute congressional drama on Capitol Hill.

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