Federal fiscal year 2023 ended on September 30th and preliminary figures from the Congressional Budget Office indicate that the annual budget deficit totaled $1.7 trillion, approximately $300 billion more than the prior year. That alone would be bad enough, but a look behind the numbers shows a more troubling picture. Some key takeaways from their report:
Changes to the student loan program skew the data. In September 2022 (the last month of FY 2022), President Biden issued an executive order canceling up to $20,000 of student debt for nearly 40 million Americans. The federal government was statutorily obligated to record the cost all at once (instead of over the life of the loans), adding $379 billion to outlays in FY 2022 and pushing the annual deficit to $1.4 trillion. Without this change, the FY 2022 deficit would have been approximately $1 trillion.
When the Supreme Court struck down Biden’s student loan cancellation several months later (in June 2023, the ninth month of FY 2023), instead of revising FY 2022 numbers, the executive branch’s Office of Management and Budget (OMB) recorded the change as a $333 billion spending cut in FY 2023, which is slightly less than last year due to Biden’s other student loan changes this year. Excluding the changes in both years, the federal budget deficit this year would have been $2 trillion—or more than double the amount last year ($900 billion).
As CBO observed, “That increase results from a combination of lower revenues and higher outlays, mostly for major mandatory programs and for payments of interest on the debt.”
The deficit is too darn high. Whether it is $1.7 trillion or $2 trillion, the FY 2023 deficit is an ominously large shortfall when you consider that the U.S. economy is quite healthy. Unemployment is low, inflation is falling, and incomes are growing. Moreover, the U.S. is neither at war nor battling a national health crisis. This suggests that patterns pre-dating the COVID pandemic are reasserting themselves and that the brief period of easy deficit reduction is behind us.
The deficit is growing again. As the COVID emergency waned, so too did all the COVID emergency spending. Now that spending and revenues are reverting to trend, however, the underlying long-term structural imbalance between spending and revenue has returned. In their most recent assessment, the non-partisan CBO projects deficits will rise to $2.85 trillion over the 10-year budget window.
The main factors driving deficits upward can be seen in CBO’s preliminary FY 2023 report. Medicare spending rose 18 percent. Social Security rose by 11 percent. Largest of all, however, was net interest on the debt, which increased 33 percent. These are precisely the categories that have long been projected as the key drivers of systemic spending growth. Their relative effect on the budget was muted during the pandemic, but it has not dissipated.
Individual income tax revenue fell. The individual income tax is the Treasury’s largest source of revenue. In most years, the agency collects more revenue than the year before, largely due to bracket creep (when incomes rise faster than inflation forcing households into higher tax brackets). Some events, however, will cause individual income tax revenue to fall (e.g., a recession, a tax cut). Income taxes on capital gains (another form of income derived from investments) are closely tied to stock market performance.
In 2023, individual income tax revenue fell by 17 percent, largely because of two phenomena. First, the IRS delayed the April 15 tax filing deadline (which was to have been credited in FY 2023) until Oct 16 (now credited in FY 2024) for taxpayers affected by natural disasters, including those in two populous states (California and Florida). This means tax revenue that would normally be credited to 2023 will be shifted into 2024. Second, the U.S. stock market underperformed and many investors reported capital gain losses. In short, the revenue spike in 2022 appears to have been a one-off rather than an indication of a fundamental shift to higher revenues. As CBO noted, it “projected that receipts would be lower in 2023 than they were in 2022, but the decline was larger than expected.”
Action is needed – now. The fact that the deficit roughly doubled in FY23 (absent the student loan scoring machinations) should serve as a sobering wake-up call to Washington lawmakers that tinkering around the edges by trimming a bit of discretionary spending is not a serious response to a very serious and ingrained problem. And that problem is likely to grow worse as interest rates continue to climb back to more traditional levels. Moreover, with serious security challenges facing the world, this is no time for the U.S. to demonstrate a feckless fiscal policy and lack of resolve.
Congress and the Biden Administration need a fiscal sustainability plan, but as of now they do not even have a plan to fund appropriations past November 17th. If they are unable or unwilling to come together on a long-term plan, they should support efforts such as the bipartisan Fiscal Commission Act of 2023 sponsored by Rep. Scott Peter (D-CA) and Bill Huizenga (R-MI) to lead the way.
No matter how you count it, the final number for FY23 represents not just a failing fiscal policy but a failure of leadership.