A Huge Surge in the Federal Deficit
Author: Greg Valliere
October 23, 2023
THE OFFICIAL DEFICIT WAS $1.7 trillion, a product of creative accounting that didn’t include student loan relief, which was written off retroactively back to 2022; it would would have added another $300 billion to the red ink in 2023. When accounting for loans that were struck down by the courts, the real deficit jumped to $2 trillion in 2023 from about $1 trillion in 2022.
MOST ANALYSTS, INCLUDING US, expected a pendulum shift toward more austere domestic spending this year, but that’s now looking unlikely. We think President Biden will get most of the $100 billion he is seeking from Congress for Israel, Ukraine and perhaps for social spending. And he may need more if Hezbollah opens up a second front.
ASSUMING THAT THERE EVENTUALLY WILL BE A HOUSE SPEAKER, Congress will produce a budget — but the 1% across-the-board spending cut that the GOP has sought is now mired in chaos in the House. Thus a 1% spending cut is unlikely.
THE DISMAL CONCLUSION is that the annual deficit probably is stuck in the $2 trillion range for the foreseeable future, which will increase borrowing costs dramatically. Interest costs on the more than $33 trillion in federal debt also rose sharply in the past fiscal year, up 23% to $879 billion, a record.
THE NEW DEFICIT NUMBERS produced howls on Capitol Hill, but it appears that spending will continue to surge. There’s no stomach for big domestic spending cuts, higher taxes, or any other policy that might reduce the deficit. The only development that might make a difference would be stronger GDP growth (and higher revenues) but the economy faces headwinds.
THE LIKELIHOOD OF CONTINUED POOR deficit data raises the threat, once again, that the credit rating agencies will have to take action, lowering the U.S. credit rating and effectively sending debt servicing costs even higher.
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