On October 20, 2023, the U.S. government reported a budget deficit of $1.695 trillion for fiscal year 2023, marking a 23% increase from the previous year. This surge was driven by declining
revenues and increased expenditures on Social Security, Medicare, and record-high interest costs on the federal debt.
The Treasury Department revealed that this deficit is the largest since the COVID-induced deficit of $2.78 trillion in 2021, representing a return to rising deficits after two consecutive years of decline during President Joe Biden's initial tenure.
This deficit comes at a time when President Biden is requesting $100 billion in additional foreign aid and security spending, which includes $60 billion for Ukraine, $14 billion for Israel, as well as funding for U.S. border security and the Indo-Pacific region.
The substantial deficit, surpassing all pre-COVID deficits, is expected to intensify fiscal disputes between Biden and House Republicans, who have been demanding spending cuts and recently pushed the U.S. to the brink of default over the debt ceiling.
A deal was struck to avert a government shutdown, but it led to the removal of U.S. House of Representatives Speaker Kevin McCarthy, and the Republican party remains divided, making upcoming negotiations for the new fiscal deadline in mid-November more challenging.
For the final month of the fiscal year, September, the deficit decreased to $171 billion from $430 billion in September 2022.
Declining revenues have played a substantial role in the 2023 deficit, underscoring the significance of President Biden's enacted and proposed tax reform policies, as noted in a joint statement by Treasury Secretary Janet Yellen and Office of Management and Budget Director Shalanda Young.
The fiscal 2023 deficit would have been $321 billion larger, were it not for the Supreme Court's decision to invalidate Biden's student loan forgiveness program, which forced a reduction in the 2022 budget results.
Taking into account these adjustments, last year's deficit would have been closer to $1 trillion, while this year's would have been nearer to $2 trillion, according to a Treasury official.
The 2023 deficit puts an end to two years of declining deficits for Biden, as COVID-19 spending waned. The deficit had peaked in fiscal 2020 at $3.13 trillion due to a sharp economic downturn and high spending.
The Congressional Budget Office has warned that, based on current tax and spending laws, U.S. deficits will return to COVID-era levels by the end of the decade, reaching about $2.13 trillion in 2030.
In fiscal 2023, total revenues decreased by $457 billion (9%) from the previous year, mainly due to reduced non-withheld individual income tax payments caused by stock market underperformance and rising interest rates.
Other factors contributing to revenue decline included a $106 billion drop in Federal Reserve earnings, as interest payments on bank reserves consumed portfolio income.
Expenditures in fiscal 2023 fell by $137 billion (2%) from the previous year to $6.134 trillion. However, expenditures would have seen more modest growth if not for substantial increases in spending on retirement and healthcare benefits for the elderly, as well as debt servicing costs.
Social Security spending increased by 10% to $1.416 trillion due to cost-of-living adjustments for inflation, and spending on the Medicare senior healthcare program rose by 4% to $1.022 trillion.
Interest costs on the federal debt, exceeding $33 trillion, also saw a sharp increase, rising by 23% to $879 billion, a record high. Net interest payments, excluding intragovernmental transfers to trust funds, increased by 39% to $659 billion, also a record.
Gross interest payments accounted for 3.28% of gross domestic product, the highest since 2001, while the net share, at 2.45%, was the highest since 1998.
Interest rates have surged over the last 18 months as the Federal Reserve raised borrowing costs to combat inflation. The average interest cost on the Treasury's outstanding debt was 2.97% in the last fiscal year, up from 2.07% in the preceding year. Photo by AgnosticPreachersKid, Wikimedia commons.