The US government ran a $1.38 trillion budget deficit in fiscal 2022 despite government receipts at near-record levels. This further highlights the federal government’s out-of-control spending problem. It’s also a big problem for the Fed as it tries to fight inflation.
The government ran a record September deficit of $429.7 billion, pushing the fiscal 2022 deficit over $1 trillion to end the fiscal year, according to the latest Treasury Statement. The massive September deficit was primarily a function of Joe Biden’s student loan forgiveness scheme.
The 2022 deficit was down from $2.78 trillion in FY21, but only because COVID spending and stimulus programs rolled off the books this year.
To put the $1.38 trillion deficit in perspective, prior to the pandemic, the US government had only run deficits over $1 trillion four times — all in the aftermath of the 2008 financial crisis. Trump almost hit the $1 trillion mark in 2019 and was on pace to run a trillion-dollar deficit prior to the pandemic. The economic catastrophe caused by the government’s response to COVID-19 gave policymakers an excuse to spend with no questions asked. Now it appears the government is settling back into the status quo – running ’08 financial crisis-like deficits every single year.
Uncle Sam was flush with cash in 2022. The Treasury took in $4.9 trillion. According to a Tax Foundation analysis of Congressional Budget Office data, federal tax collections were up 21% in the 2022 fiscal year that ended on Sept. 30.
The US government isn’t just making a windfall in absolute terms. Tax collection is at a multi-decade high of 19.6% as a share of GDP. That is up from 17.9% in fiscal 2021 and is approaching the last peak of 20% set during the dot-com bubble in FY 2000.
The problem is on the spending side of the ledger.
The Biden administration spent $6.28 trillion in FY22.
And there is more spending coming down the pike.
The US government is still handing out COVID stimulus and it wants more. Congress recently pushed through another massive spending bill. Meanwhile, the US continues to shower money on Ukraine and other countries around the world. And we’re just starting to see the impact of student loan forgiveness.
On top of increased spending, rising interest rates will balloon the deficits even more.
Every increase in interest rate raises the federal government’s interest expense. In fiscal 2022, the US Treasury has forked out $475 billion just to fund the government’s interest payments. That was up about 30% from last year. Interest expense ranks as the sixth largest budget expense category, about $250 billion below Medicare.
According to the Congressional Budget Office, interest expense is about to balloon. It projects interest payments will triple from nearly $400 billion in fiscal 2022 to $1.2 trillion in 2032. And it’s worse than that. The CBO made this estimate in May. Interest rates are already higher than those used in its analysis.
This is bad news for a central bank trying to raise interest rates to battle inflation. If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
More significantly, the US government can’t keep borrowing and spending without the Fed monetizing the debt. It needs the central bank to buy Treasuries to prop up demand. Without the Fed’s intervention in the bond market, prices will tank, driving interest rates on US debt even higher.
A paper published by the Kansas City Federal Reserve Bank acknowledged that the central bank can’t slay inflation unless the US government gets its spending under control. In a nutshell, the authors argue that the Fed can’t control inflation alone. US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.
Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.”
This clearly isn’t in the cards.
Something has to give. The Fed can’t simultaneously fight inflation and prop up Uncle Sam’s spending spree. Either the government will have to cut spending or the Fed will have to keep creating money out of thin air in order to monetize the debt. You can decide for yourself which scenario you find more likely.
According to the National Debt Clock, the debt-to-GDP ratio is 129.52%. Despite the lack of concern in the mainstream, debt has consequences. More government debt means less economic growth. Studies have shown that a debt-to-GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
To put the debt into perspective, every American citizen would have to write a check for $93,709 in order to pay off the national debt.
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