at President Biden drew bipartisan applause in February’s State of the Union address when he urged Republicans and Democrats to commit not to reform Social Security and Medicare. Debt ceiling negotiations over the summer did not reform either program. With very few exceptions, nearly every politician in Washington refuses to support major spending reforms.
Politicians used to talk more about spending reform, but their inaction on this issue is not a new phenomenon. According to Treasury data adjusted for inflation, the last time the national debt declined was in 2001, which ended three consecutive years of declines. In 1998, the debt was $10.3 trillion, and in 2001 it was $9.67 trillion. It has increased every year since then and now stands at over $31 trillion.
Headline dated September 3rd washington post “Even as the economy grows, the U.S. deficit will explode.” The committee cited estimates from the Committee for a Responsible Federal Budget that show the fiscal year 2023 budget deficit will likely double to $2 trillion. CRFB has been working on this issue for a long time and knows the facts inside and out. 2023 shouldn’t have surprised anyone, and 2022 should have been a warning siren on spending.
In 2022, the pandemic itself will end. The pandemic recession is a thing of the past. The unemployment rate was around or below 4% for the entire fiscal year. Historically, 4% was considered full employment, or slightly better than full employment. (Even in the best of times, the unemployment rate remains in the low single digits, as people still voluntarily change jobs or refrain from taking new jobs.)
The United States was not at war. No new domestic programs were created specifically because the Supreme Court struck down the unconstitutional and illegal student loan program. Inflation boosted revenues because taxes were adjusted the year after the new inflation. Personal income tax collections are at an all-time high. Corporate tax collections increased as companies reported strong profits. Total revenue reached a record high of $4.9 trillion. The federal government collected 20 percent of GDP in taxes, compared to an average of 17 percent over the past 50 years.
However, in 2022, the United States recorded a deficit of $1 trillion. And if the Biden administration had its way with student loans, that amount would have been $1.4 trillion.
The 2022 deficit was praised by the Biden administration and perhaps too kind to most in Washington, as that deficit was much smaller than the deficits of the previous two years, which included trillions of dollars in coronavirus spending. I guess he was treated too much. However, this deficit should have been a wake-up call. If the highest federal revenues in U.S. history, in an era of low unemployment, no wars, and no major new programs, were still not enough to bring us close to a balanced budget, that’s a problem. .
If that weren’t alarming enough, it has long been widely known that the budget deficit will widen in 2023. The Congressional Budget Office publishes a publication called Monthly Budget Review. Federal spending can vary significantly from month to month. In some cases, depending on the timing of payments and receipts, the federal government can run a surplus in a given month even though it has a large deficit for the year.
So far in all but the first month of fiscal 2023, which began in October 2022, the government has fallen into an even deeper hole than in the same month of the previous fiscal year. And the only reason the first month looked strong was because October 1, 2022, was a weekend, and the federal government made a $63 billion payment just days before that, and that spending was in the previous fiscal year. It was included in the year.
The accumulated deficit was $44 billion higher in November 2023 than in fiscal 2022, and $105 billion higher through December. By January, it had increased by $264 billion. This gap widened every month through July (the latest for which data is available from CBO), with the cumulative deficit in fiscal year 2023 being $954 billion higher than in fiscal year 2022.
“From October to July, revenues decreased 10% and expenditures increased 10% compared to the same period in fiscal year 2022,” the CBO said. The budget deficit in 2023 is expected to be $1.7 trillion, including the phantom savings from the Supreme Court’s decision to overturn the student loan program. This is why the CRFB expects the actual deficit to be around $2 trillion.
The student loan program’s discrepancies are not CBO’s fault. It uses neutral budget scoring rules and includes government-enacted programs, legal or illegal, in its estimates. CBO will remove a program from the estimate only if the program is removed due to a change in law or a court decision. The cause of this discrepancy is not the CBO’s scoring rules, but the Biden administration’s misconduct.
The so-called Inflation Reduction Act has not reduced the budget deficit as its proponents claimed. The IRA included increased taxes on companies, primarily to pay for subsidies for green energy. Biden signed the IRA into law on August 16 of last year, and on August 16 of this year, the Tax Foundation released a report on the law’s implementation status.
On the revenue side, IRAs disrupt businesses and Treasurys alike, the report explains. IRAs were subject to a 15% minimum tax on corporate profits based on financial accounting rather than tax accounting. The purpose of financial accounting is to provide information about the company to shareholders. The purpose of tax accounting is to measure taxable income according to tax laws. Because tax laws are so complex, there are countless ways for businesses to lower their taxable income, even if their financial reports show high profits.
That’s perfectly legal, but Democrats thought they could outsmart corporations by imposing a minimum 15% tax on profits based on financial accounting rather than tax accounting. As the Tax Foundation report puts it, this provision is “a new tax based on a new tax base” and creates a bureaucratic nightmare in understanding how such a tax would work. produced. Several guidance documents from the Ministry of Finance do not clarify important aspects of the tax, and collection of tax revenue has been suspended until the issues are resolved.
On the spending side, the IRA’s 22 tax deductions are being utilized much faster than expected. When Congress’s Joint Committee on Taxation (JCT) released its cost estimates for the tax credits in August 2022, it expected the total cost from 2023 to 2031 to be $271 billion. When the JCT recalculated the score according to the law’s actual operation in May, the total cost for the same period almost doubled to $536 billion.
When Congress passes a tax law, such as an IRA, it is only the first step in determining what that law will do. The Treasury Department, including the IRS, has wide discretion to interpret statutes passed by Congress. Like the discrepancies in CBO’s deficit estimates, the wide divergence in initial estimates is not his JCT’s fault. It could not have been known in advance how Biden administration officials would implement the law.
Various guidance documents from the IRS have expanded the tax deduction beyond JCT’s expectations. For example, the IRS said the income limits, vehicle price limits, and domestic product requirements for the electric vehicle (EV) tax credit do not apply to leased vehicles. Leasing now accounts for about a third of U.S. EV sales, and the expected cost of EV tax credits has increased by 524%, according to the latest JCT Scores.
The JCT score is also limited to the text of the statute and does not take into account how other government programs interact with the statute. The Tax Foundation said in a report that the EPA’s separate efforts to promote EV adoption, including the imposition of stricter emissions standards announced earlier this year, have made the credit available to more taxpayers. It has been pointed out that it may encourage The EPA itself estimates that its mandate will cost it $210 billion in lost tax revenue between 2027 and 2032.
The IRA is the bad guy, the Democrats lied when they said the deficit would be reduced, and the Republicans were right to oppose it. But both parties agreed not to reform Medicare and Social Security, the ultimate drivers of the debt. They kept that promise, and a new budget goblin was born: interest payments.
As Brian Riedl wrote in April for NRO’s Capital Matters, Medicare and Social Security will spend $649 billion more than they earn this year. By 2033, we will be spending $1.7 trillion more than we earn. Cumulatively over the next 30 years, Medicare and Social Security will spend $69 trillion more than they earn, according to the CBO.
By law, benefits must be paid, and CBO expects the government to borrow money to make up the difference. (It’s also possible that we’ll print more money to help pay the bills. If nothing changes, we’ll end up with a combination of both that increases taxes and increases inflation.) It expects borrowing to add $47 trillion to the $69 trillion. This would bring the total cost of Social Security and Medicare to $116 trillion in new debt over the next 30 years. The entire remainder of the federal budget (including the military, education, infrastructure, nutrition programs, national parks, agricultural subsidies, law enforcement, foreign aid, aka everything politicians usually talk about) does not increase the national debt by any amount. Never. A significant amount occurs over the same period of time.
Net interest payments accounted for 10 percent of federal spending in 2023. By 2053, it will account for 23 percent. Almost a quarter of federal spending would be used solely to finance other federal spending. About two-thirds of the expected increase in borrowing costs is due solely to higher interest rates, which CBO cites as the reason for the increase in federal debt. Rising debt causes higher interest rates, which in turn creates more debt, crowds out private investment, and reduces the economy’s productive capacity.
This is one of the most troubling cycles in politics, and both parties are basically promising to bring it about. The widening budget deficit this year is not surprising, and we should not be surprised if we see more deficits in the future. So far, politicians have kept their promises, but it would be better not to.