An impending swell in the United States federal budget deficit for the fiscal year 2023 is looming on the horizon. With preliminary figures projecting an approximately $2 trillion deficit, a figure almost twofold that of the fiscal year 2022 deficit, a fiscal imbalance remains a pressing concern.
Unlike the previous fiscal year when the deficit fell, mostly due to the conclusion of significant Covid-19 pandemic relief expenditures, the prediction for 2023 is growing large. This anticipated escalation largely stems from receding tax revenues, which has coincided with accelerating mandatory spending, particularly in sectors such as Social Security, Medicare, and interest payments among others.
Interestingly, the Committee for a Responsible Federal Budget’s tally does not incorporate President Biden’s rejected federal student debt cancellation plan. It’s important to note, the $1.4 trillion fiscal year 2022 deficit cited by the US Treasury Department does account for the cost of the now invalidated proposal. Furthermore, it is predicted that the current fiscal year will showcase a deficit of about $1.7 trillion, reflecting the cancellation of Biden’s plan.
The burgeoning deficit is inevitably going to complicate the already strained debate on federal agency funding for the succeeding fiscal year, set to commence on October 1st. It is anticipated that hardliners among the House GOP, committed to fiscal austerity, could steer the conversation towards budget cuts.
While a consensus on the debt-ceiling deal projected to pare down budget deficits by $1.5 trillion in the next ten years is a step in the right direction, it is far from a comprehensive solution. Economic experts opine that it’s not sufficient to tackle the country’s vast financial challenges.
Although it’s typical for budget deficits to contract during economic growth, the present fiscal scenario defies this trend. “If the deficit is this high when the economy is strong, imagine what it’s going to look like when the economy is weak,” warns Marc Goldwein, an authority on budget issues. He further voices concerns about our political, economic, financial, and inflationary capacity to borrow for future crises.
Several factors contribute to the deficit’s expansion. Firstly, a substantial dip in tax revenue following a buoyant 2021, facilitated by a thriving stock market and strong housing market. Yet, the fickle nature of these markets manifested in a slumped stock market and a cooling housing market, hit by rising mortgage rates as the Federal Reserve boosted rates repeatedly.
Government spending experienced a hike of 10 percent, with the most substantial increases observed in Social Security benefits, and Medicare. Soaring interest payments on the public debt, fuelled by escalating interest rates have accelerated expenditure too. Collectively, these factors apply significant pressure on the nation, earmarking fiscal adjustments in the form of spending cuts or tax increases as imperative actions for the near future.
“We made a lot of economic policy assuming that interest rates would always be low and assuming that revenue would be strong. That can change quickly, and when it does, you can’t undo past decisions,” warns Marc Goldwein. As concerns rise, it becomes increasingly evident that the projected budget deficits need to be managed astutely, with a view to future resilience and sustainability.