by Xiong Maoling and Matthew Rusling
Recently released data showed that U.S. federal deficit in fiscal year 2023 expanded significantly, with already elevated U.S. debt piling up. Why U.S. budget deficit keeps growing? What are the political obstacles that prevent budget deficit from coming down?
The U.S. federal government recorded a budget deficit of nearly 1.7 trillion U.S. dollars in fiscal year 2023, which ended in September, up 23.2 percent from the previous fiscal year, the Treasury Department said in a recent report.
This adds to America’s already ballooning federal debt, which recently exceeded a staggering 33.6 trillion dollars.
Soaring debt has also pushed up the Treasury’s debt issuance. Former Dallas Federal Reserve President, Richard Fisher, said that the daily borrowing of the U.S. government for the next 90 days as the country goes into the last quarter is 8.66 billion dollars a day. “These numbers have gotten horrendously large,” he told CNBC.
The federal deficit grew significantly more last year than expected due to rising borrowing costs and declining tax revenues, according to an analysis from the Congressional Budget Office.
Since March 2022, the U.S. Federal Reserve has lifted interest rates from near zero to 5.25-5.5 percent in an aggressive tightening cycle. With the latest decision on Wednesday, Fed has now skipped a rate hike for two consecutive meetings for the first time since the start of the tightening cycle, but interest rates remain a 22-year high.
Meanwhile, data from Treasury Department showed that net interest reached 659 billion dollars in the fiscal year 2023, ranking sixth in the outlays and accounting for 10.7 percent of the total outlays, which indicated growing cost to finance the debt amid higher interest rates.
In addition, massive government borrowing will lead to a glut of supply in the bond market, which will drive down prices and push up yields, Fisher said. That would create a vicious cycle of rising debt and rising interest payments.
On the tax side, the decrease in tax revenue in fiscal year 2023 was mainly caused by three factors: lower capital gains tax revenue amid the volatility in financial markets, surging claims for a tax break from the pandemic era due to possible fraud, as well as natural disasters, which prompted the Internal Revenue Service (IRS) to delay tax-filing deadlines in some states, such as California.
Beyond such short-term factors, there are structural reasons for the soaring deficit. Peter G. Peterson Foundation has said that the U.S. fiscal deficit is largely due to aging baby boomers, rising healthcare costs and an unreasonable tax system, and that the pandemic has accelerated an already unsustainable fiscal trajectory.
The tax system has been a bone of contention between the Democratic and Republican parties. Biden administration officials and Democratic lawmakers have sought to blame the rising deficits on former President Donald Trump, arguing that a Republican tax cut he signed into law in 2017 reduced federal revenue and widened deficits. A political fight is also likely when most of Trump’s tax cuts are set to expire at the end of 2025.
The Biden administration, despite calling for tax on the rich, signed into law only two measures — a minimum tax on large corporations and a tax on stock buybacks, and also increased funding for the IRS to fight tax fraud.
Such measures, however, are not enough to offset the overall projected increase in deficits in the coming years, according to The New York Times.
Budget groups have long warned that U.S. fiscal policy is unsustainable, and both parties are to blame.
“How we got here is a long story of repeated chapters of fiscal irresponsibility on both sides of the aisle. Leaders in Washington have made imprudent decisions over decades, time and again choosing a favorite new tax cut or spending program above our collective future,” Michael Peterson, CEO of the Peter G. Peterson Foundation, said when the U.S. debt exceeded 30 trillion dollars for the first time.
It’s clear where the rub lies, but why is it so hard to slash fiscal deficit?
“We could tax more or cut some spending, but there is little political support for either,” Dean Baker, senior economist at the Center for Economic and Policy Research, told Xinhua.
In an opinion piece in the The New York Times, Nobel Prize-winning economist Paul Krugman recently said that despite Republicans touting government spending reduction, “ask voters about specific spending, and there’s almost nothing they want to cut.”
Social Security, health care and other safety net programs accounted for most government spending. Add military spending and interest payments, and what’s left –“nondefense discretionary” spending — is a small slice of the total. “So there’s no possibility for major spending cuts unless we slash programs that are extremely popular,” Krugman argued.
Raising taxes is also politically difficult. Conservatives have long wanted to cut taxes, and Republicans have even tried to reduce funding for the IRS, even though Democrats have accused them of intentionally limiting the resources needed to track down tax cheats by the wealthy.
While Democrats say they are willing to tax the rich, it is difficult to implement the policies. And Democrats are reluctant to endure the political pressure to raise taxes on the middle class.
“It’s politically difficult for the Biden administration to try to make sure that the most wealthy are paying in accord with their share of the economy,” Clay Ramsay, a researcher at the Center for International and Security Studies at the University of Maryland, told Xinhua.
“It’s also been hard even to support the IRS with the resources to collect what the most wealthy owe under existing law,” Ramsay said, adding that the IRS did receive 80 billion dollars to be spent over 10 years in August. Republicans, meanwhile, have been trying to rescind the IRS funding.
Observers believe that America’s debt problem largely stems from its two-party system, in which both parties want to spend more money to please their voters and garner more votes. While reining in debt growth is good for the U.S. economy in the long run, no administration or political party wants to be remembered as the “devil” who reduces welfare programs or raises taxes.
For the upcoming 2024 presidential election, the ballooning deficit and debt is not likely to take center stage.
“The Republicans will argue that the administration’s spending is largely waste, and Democrats will argue that it is largely investment, plus vital maintenance … The Republicans will argue that tax revenues should be cut and are hurting the little guy; the Democrats will argue that the rich are not paying their fair share,” Ramsay said.
These arguments, which date back to the 1930s, won’t have much impact on voters’ decisions in the presidential election, he said.
Echoing his views, Brookings Institution Senior Fellow, Darrell West, told Xinhua that deficits traditionally have not been a big issue in American elections. “I don’t think it will be decisive in the upcoming election,” West said.