The unexpected surge in budget deficits, amid signs of strong overall economic growth, has come as lawmakers face choices over a possible government shutdown this fall and trillions of dollars in overdue taxes as they head to the Capitol. likely to shape a heated debate over the country’s fiscal policy. cut. The Senate returns from its August recess this week, and the House returns next week. Biden and House Speaker Kevin McCarthy (Republican, California) approved a deal in June to raise the nation’s borrowing ceiling, but it did little to change the trajectory of long-term debt.
A widening budget deficit could undermine Mr. Biden’s attempt to credit budget restraints for the 2024 presidential election. And that could pose a challenge for Republican lawmakers who are pushing to expand the more than $3 trillion in tax cuts they approved in 2017, even as they call for fiscal responsibility.
“The budget deficit will basically double from 2022 to 2023,” said Mark Goldwine, senior vice chairman of the Committee for a Responsible Federal Budget. “This should prompt a serious evaluation of federal policy going forward, but he fears it won’t.”
The surge in red ink has confused the expectations of many economists. Deficits usually shrink as the economy grows. This is because businesses and consumers will have to pay more taxes, and governments will have less to spend to protect those who have lost their jobs. And usually, during recessions, these factors reverse and the deficits widen again. But the current surge in budget deficits coincides with a period of unusually strong economic growth amid historically low unemployment and strong corporate profits.
Jason Furman, a top economist in the Obama administration and now an economics professor at Harvard University, said the current surge in deficits could be surpassed by World War II, the 2008 financial crash, or the financial crisis. He said it was only a “grave crisis” of coronavirus pandemic. Fuhrman said that the only time the US has had such a large share of the economy, or that the deficit has increased so much, is during such a national catastrophe. The US economy is expected to grow at a steady 2.1% this year.
“It’s really amazing to see this in an economy with low unemployment. We’ve never seen anything like this before,” Furman said. “The economy is good and strong, and there is no new emergency spending, but the deficit is this big. The fact that it is this big in a year suggests that something strange must be going on. It will make you think.”
From August 2022 to July this year, the federal government has spent about $6.7 trillion, bringing in about $4.5 trillion. That translates into a 16% increase in spending and a 7% decrease in revenue from the previous year, according to the Commission on a Responsible Federal Budget.
The dramatic drop in the deficit last year was largely due to the expiration of trillions of dollars in emergency coronavirus aid approved during the Trump and Biden administrations. But other factors boosted overall spending this year, even as coronavirus-related spending continued to decline.
The finance ministry expects new income to drop sharply this year, partly due to the slump in the stock market last year. In 2021, amid a cryptocurrency bubble and a home price explosion driven by lowest interest rates, investors have posted huge profits and paid record levels of capital gains taxes. But then the bubble burst and capital gains tax revenues plummeted. The automatic adjustment of taxes for inflation also reduced the tax liability of many Americans, resulting in lower incomes compared to last year.
Since then, many other spending increases have contributed to the rising deficit. Social security payments increased to keep pace with inflation. The government spent more on education, veterans benefits, and health care. And the bipartisan Infrastructure Act and the Controlled Inflation Act of 2022 began draining billions of dollars from government accounts.
Experts are sharply divided on how pressing the economy is from rising budget deficits.
Demand for dollars remains strong, allowing the federal government to issue more bonds even as interest payments rise. Not always. In Argentina, soaring debt levels have forced the government to impose restrictions to prevent citizens from taking money out of the country. Other sovereign debt crises have featured catastrophic depreciation in exchange rates amid investor fears of currency devaluation. These signs of distress have not materialized in the United States.
Fears of an Obama-era debt crisis have also consistently failed to materialize, and the warnings of fiscal conservatives calling for budget cuts have encouraged those who see them as overblown and ideological.
“When you think of regions that have real financial sustainability problems and have reached the stage of crisis, we know what those regions are like, but here doesn’t look like it,” said Matthew C. Klein. He is the publisher of Overshoot, a subscription research service focused on the global economy. “We can debate whether we want it or not, but this is not really a crisis.”
But some economists remain deeply concerned about the long-term fiscal situation. Rising government deficits can lead to higher interest rates, distorting private investment and pushing up the cost of loans such as mortgages. Economist Brian Riedl of the Manhattan Institute, a libertarian-leaning think tank, said the U.S. annual budget deficit is on track and could grow by nearly $3 trillion over the next decade.
“If debt grows much faster than economic growth, we risk a federal debt crisis as interest rates rise, economic investment declines, and eventually interest payments become the largest federal expenditure,” Riedl said. Ta.
Other experts say that even if the U.S. actually has room to spend more, the realization of a widening budget deficit will encourage policymakers to approve spending to combat the next economic downturn. He pointed out that it could be difficult.
“If there is a perception that the budget deficit is too high, it will become ‘too high’ as it becomes self-limiting. dear,” said financial expert Kayla Scanlon. She is an analyst who founded Bread, which produces financial education.
This change could also have more direct political implications. Biden has regularly touted a reduction in the budget deficit over 2021-2022, arguing that President Donald Trump has restored fiscal responsibility to the White House after adding more than $7 trillion in debt. Ta.
“Unlike House Republicans, President Biden is serious about reducing the budget deficit and will continue to denounce the Republican debt hypocrisy,” White House Press Secretary Michael Kikukawa said in a statement. The statement also emphasized that Biden’s budget would cut the deficit by trillions of dollars through higher taxes on the wealthy and corporations.
Still, Republicans are likely to continue to insist that they are more responsible fiscal managers. But Republican leaders are pushing for an extension of about $3.3 trillion in tax cuts, including tax cuts for large corporations and a reduction in inheritance taxes paid only by a few wealthy families.
