Over the past year, President Joe Biden has been taking victory laps – despite stumbling along the way. He claims to have cut the budget deficit, something that not even his allies in the mainstream press believed. Now that much of the pandemic-era spending has expired or dwindled, federal spending is being driven by Bidenomics, which is fueling the shortfall. With the Treasury Department’s monthly statements confirming that America’s finances are deteriorating at a rapid pace, will the president champion his fiscal record again?
The June Budget Deficit
In June, the US government deficit was $227.8 billion, up 156% from the same month a year ago and worse than the consensus estimate of -$175 billion. Outlays surged 17.5% to $646 billion, while revenues tumbled 9.2% to $418 billion. In the first nine months of the fiscal year, the budget deficit stood at $1.393 trillion, and experts warn that it could exceed $1.6 trillion this year.
According to the Committee for a Responsible Federal Budget (CRFB), the 12-month rolling deficit from July 2022 to June 2023 is $136 billion higher at $2.2 trillion, as nominal spending is up 14% to $6.7 trillion, and revenue is down 7% to $4.5 trillion.
Of course, the spending was driven mainly by mandatory expenditures, including Medicare ($137 billion) and Social Security ($121 billion). This is primarily why the national debt and the federal deficit will never return to a normal level again. Neither side of the political aisle is willing to reduce these outlays even slightly. In fact, based on the latest debt ceiling agreement between President Biden and House Speaker Kevin McCarthy (R-CA), officials can only use eyebrow scissors to cut anything from these astronomical budgets.
“With deficits expanding, substantial policy change will be needed to bring spending and revenue in line,” the CRFB said in a report. “The recent Supreme Court ruling against the legality of student debt cancellation and the implementation of the Fiscal Responsibility Act are likely to help reduce deficits in the near term, but much more action will be needed to stem the unsustainable medium- and long-term trajectory of the debt. Policymakers should work together to get the economy and our fiscal health back on track.”
But the most notable component of the Monthly Treasury Statement (page nine, table 3) was net interest costs. Last month, the cost of servicing federal government debt increased by $122 billion, bringing the fiscal year-to-date total to $652.4 billion, up 15% year-over-year. By comparison, the White House forecast that total net interest payments would be $396 billion. The fiscal year is still ongoing, and interest payments are greater than income security, national defense, veterans’ benefits and services, education, and transportation.
The Federal Reserve is poised to deliver at least one more rate hike at the July Federal Open Market Committee (FOMC) policy meeting, lifting the benchmark fed funds rate to a target range of 5.25% to 5.5%. Once the Eccles Building’s quantitative tightening cycle has reached its limit, the next debate among officials will be when to cut the terminal rate. The belief is that the central bank should leave rates high until 2025. Even if the institution engages in lowering rates, Chair Jerome Powell or his successor is likely to do it incrementally on the way down (25 or 50 basis points at a time), meaning that interest payments will still be elevated.
Charlie Bilello, a financial markets expert, recently said it best on Twitter: “The US government continues to spend money like a drunken sailor.” But he also made another excellent point. The national debt and budget deficit are exploding as the US economy is still expanding (though at an anemic pace), and the unemployment rate is below 4%. What happens when a recession strikes, the jobless rate rises, and the government inevitably launches stimulus programs? At this stage, Republicans and Democrats should throw their hands up and concede defeat, admitting that the fiscal crisis will never be resolved. that at least would be honest about the most pressing issue facing future generations.
Indeed, when former Treasury Secretary Larry Summers finally says that US deficits are on a “completely unsustainable path,” it might be time for another look at the books.
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