The US government ran a massive $248.5 billion deficit in November, according to the latest Monthly Treasury Statement. There was only one month in fiscal 2022 with a bigger budget shortfall. This is bad news for the Federal Reserve as it tries to cut interest rates and shrink its balance sheet to fight price inflation.
The big deficit was primarily due to a significant drop in government receipts even as the Biden administration continued to spend at a torrid pace.
With the big deficit in November, the total budget shortfall is already over a quarter trillion dollars ($336.4 billion) just two months into fiscal 2023.
The Biden administration has been spending money at around half a trillion dollars per month for over a year. In fiscal 2022, the US government ran a $1.3 trillion deficit. That would have been even bigger were it not for a big jump in tax receipts. With the economy slowing, that tax windfall may be coming to an end.
Government receipts fell to $252.1 billion in November. That was down 10.3% from last November and 20.8% from last month.
Uncle Sam was flush with cash in fiscal 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. Tax collections also came in at a multi-decade high of 19.6% as a share of GDP.
Individual income tax receipts are projected to decline as a share of GDP over the next few years because of the expected dissipation of some of the factors that caused their recent surge. For example, realizations of capital gains (profits from selling assets that have appreciated) are projected to decline from the high levels of the past two years to a more typical level relative to GDP. Subsequently, from 2025 to 2027, individual income tax receipts are projected to rise sharply because of changes to tax rules set to occur at the end of calendar year 2025. After 2027, those receipts remain at or slightly below the 2027 level relative to GDP.”
The bigger problem is the US government can’t seem to get its spending under control.
The Biden administration blew through $500.65 billion in October.
Spending was up 6% over last November 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.
On top of increased spending, rising interest rates will push the deficits up even more. Annualized interest on marketable debt is at $459 billion, up $28 billion in the last month alone. And the trajectory looks dramatically worse as existing debt rolls over. By March, annualized interest will come in at around $600 billion, reaching almost $700 billion by July.
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.)
According to the National Debt Clock, the debt-to-GDP ratio stands at 121.85%. 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 $94,226 in order to pay off the national debt.
A Big Problem for the Fed
The soaring national debt and the US government’s spending addiction are big problems for the Federal Reserve as it battles price inflation.
As you’ve already seen, the push to raise interest rates is putting a strain on Uncle Sam’s borrowing costs. But there is an even bigger problem. The Fed can’t slay monetary inflation — the cause of price inflation — with rate cuts alone. The US government also needs to cut spending.
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.
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