The debt limit crisis is behind us for now, but the budget deficit is decidedly heading in the wrong direction. Last week, the Congressional Budget Office (CBO) reported in its May Monthly Budget Review that over the first eight months of Fiscal Year 2023 the budget deficit was $1.2 trillion, $735 billion more than the same period last year.
That’s a substantial increase and it’s all the more significant because there is no one single factor behind it. Spending is up by 11 percent from last year’s pace and revenues are down by 11 percent. This suggests that patterns pre-dating the COVID pandemic are reasserting themselves and that the brief period of easy deficit reduction is behind us.
In 2020, the deficit spiked to $3.1 trillion as the budget and economic effects of the COVID pandemic took a heavy toll. Since then, however, the deficit dropped to $2.8 trillion in 2021 and plunged to $1.4 trillion in 2022. Even though the 2022 deficit was still quite high by historical standards, the decline from 2020 allowed President Biden to boast of dramatic deficit reduction during his administration. But the tide is turning once again.
The CBO is projecting that this year’s deficit will rise to $1.5 trillion despite the fading effect of pandemic spending. The main factors driving this upward turn can be seen in CBO’s May budget review. Medicare spending is up by 17 percent so far this year. Social Security is up by 11 percent, and Medicaid by 8 percent. Largest of all, however, is net interest on the debt, which is up by 34 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.
On the revenue side, this year’s slump is a reality check on the huge revenue gain in 2022, which is now looking more like a one-year phenomenon. In its latest baseline, CBO projects that revenues will fall from 19.6 percent of gross domestic product (GDP) in 2022 (the highest since 2000) to 18.4 percent in 2023. As noted in the May Budget Review, “CBO anticipated that receipts would decline this year, but the decline has been larger than expected.”
With the fastest growing programs (Social Security, and Medicare) off the table by the President’s vow to “stand up for seniors” and with revenue increases also off the table due to House Republican opposition, it is easy to understand why the recent Fiscal Responsibility Act (FRA) suspending the debt limit had so little effect on the nation’s unsustainable fiscal path.
By essentially limiting the debate to discretionary programs, which comprise only 27 percent of total spending, it was difficult to make a dent in the debt. According to a CBO estimate, the effect of the FRA would be to reduce the debt by roughly 3 percent as a share of GDP a decade from now (from 119 percent of GDP to 115 percent).
Later this month, CBO will publish its updated long-term budget outlook. It will undoubtedly demonstrate why recent celebrations of post-pandemic deficit reduction and a budget deal that left so much off the table are premature.
What does Congress plan to do about it? Don’t look for heroics. Social Security and Medicare remain untouchable, members of both parties are looking ways to get around the newly enacted discretionary spending caps, and Republicans are planning a new package of tax cuts. All of which demonstrates the futility of relying on the debt limit to put a lid on deficit spending. The only way to get the debt under control is to change the policies that produce so much of it. Obviously, that message has not sunk in.