President Joe Biden went on a spending binge in the homestretch of his term as the US government borrowed more than $700 billion in the first three months of fiscal year 2025. The Congressional Budget Office (CBO), a nonpartisan budget watchdog, assessed the latest federal deficit figures and concluded that Uncle Sam spent more than he did a year ago. Could President-elect Donald Trump inherit a $2.8 trillion shortfall when Sept. 30, 2025, rolls around? Unless the Department of Government Efficiency, or DOGE, tosses a Hail Mary, it looks very much possible.
Government Spending Offends Drunken Sailors
Before the Treasury Department published its monthly statement in December, the CBO released its monthly budget review. While not perfect, the organization is typically within plus or minus a few billion dollars of the official numbers, which is, incidentally, how much the United States spends on daily interest payments.
In December, the estimated deficit was $85 billion as revenues were higher than a year ago and outlays were smaller. However, due to shifts in the timing of various federal payments, the shortfall would have been $35 billion higher than reported. The big-ticket spending items saw sizable increases last month, such as Medicare (20%), net interest on the public debt (19%), and Social Security benefits (7%).
In the first quarter of FY 2025, the US government's budget deficit totaled $710 billion, $200 billion more than the shortfall registered in the last fiscal year. Spending was 11% higher, reaching $175 billion. Revenues tumbled 2%, totaling $25 billion.
The Committee for a Responsible Federal Budget, an independent policy organization, projects that Uncle Sam is maintaining a $2 trillion rolling 12-month deficit.
The usual suspects were the major contributors to the deficit. The top budgetary items in the first quarter were Social Security ($373 billion), Medicare ($231 billion), Medicaid ($159 billion), and the military ($249 billion). The net interest on the debt, which represents the amount of interest the US government pays on its debt after removing the interest income it generates, was actually the third-largest outlay, reaching $245 billion.
Since individual income tax collections exceeded $500 billion, nearly half of what taxpayers gave to Washington was allocated to servicing the $36.1 trillion national debt. Additionally, payroll and corporate income taxes were $391 billion and $109 billion, respectively.
As a share of the economy, the deficit represents about 6.9% of the GDP, up from 6.4% in 2023.
About the Debt Ceiling
It’s that time again: debt limit showdowns. The United States is in the early stages of negotiations over the debt ceiling, a bipartisan game of chicken in which one side (the opposition) makes demands from the other (the party holding power). They will be on the cusp of disaster, and then the pizza boxes traverse the halls of Congress, and party leaders strike a deal. It is a predictable ending.
That said, the CBO also posted a notice about the debt ceiling at the bottom of its summary:
"The statutory debt limit was reinstated on January 2, 2025, and set at $36.1 trillion, matching the amount of total debt outstanding on the prior day. In the coming weeks, the Department of the Treasury is expected to announce a 'debt issuance suspension period' and to take 'extraordinary measures' to borrow additional funds without breaching the debt limit. CBO will publish information in a few weeks on its estimate of how long those measures will remain in place."
Every couple of years, the American people hear about these extraordinary measures. What are they? To avert a default on the US government's obligations, the Treasury employs a wide array of actions, such as redeeming existing investments, suspending new investments in specific government funds, and drawing down from the Treasury General Account in its bank account at the Federal Reserve. The X-date, when these extraordinary measures are exhausted and without a debt ceiling in place, is estimated to be sometime in June or July.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, urged the incoming administration and the new Congress to address the myriad fiscal challenges ahead. "A great start would be committing to no new borrowing and guaranteeing all tax cuts and spending increases are fully offset," MacGuineas said in a statement. "If lawmakers start the year working to improve our nation’s fiscal situation, then our future challenges won’t be so daunting."
A Preview
The CBO will release its 2025-2035 economic and budget outlook later this month. The report will showcase enormous numbers, from annual interest payments to mandatory spending totals. Officials will conclude that it is unsustainable. Since neither party is willing to tackle the elephant in the room – Social Security, Medicare, and Medicaid – the can will be kicked down the road to the next debt ceiling standoff, or maybe until the 2028 election.
While fiscal conservatives had hoped that billionaire Elon Musk and Vivek Ramaswamy could take a Javier Milei chainsaw to the $7 trillion US budget with DOGE and slash $2 trillion spending, the Tesla Motors and SpaceX CEO recently admitted that a “good shot” was half that. Still, it is better than nothing, but it proves that the greatest minds cannot slay the Leviathan.
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