Federal Deficit Could Widen as Economy Slows, Borrowing Costs Rise
A cooling U.S. economy and rising interest rates could widen the federal budget deficit, potentially undercutting the White House’s message that a shrinking budget gap under President Biden shows fiscal responsibility in a time of high inflation.
The budget deficit for the 2023 fiscal year, which began Oct. 1, is expected to hold nearly steady from the last fiscal year, at more than $1 trillion, the White House and private sector economists say.
That would mark a break from the just-ended fiscal year when a rise in revenue, particularly from individual income taxes, and reduced government spending on Covid-19 programs helped shrink the annual deficit. Higher income taxes were in part propelled by a strong labor market delivering raises to many workers.
The nonpartisan Congressional Budget Office estimates the federal budget shortfall shrank by roughly half to $1.4 trillion in fiscal year 2022, which ended Sept. 30. The Treasury Department is scheduled Friday to release its final figures for the fiscal year.
Some budget analysts say higher deficits and government debt levels carry hazards for the nation’s fiscal outlook. Running annual deficits requires the government to borrow, often from overseas investors. The debts then need to be repaid either through more borrowing, higher taxes or reduced spending. The CBO in May projected the deficit will rise in most years during the next decade and top $2 trillion in 2031 and 2032.
High deficits and borrowing could limit the federal government’s ability to respond to public needs, such as nutrition and education programs, said Christina Skinner, an assistant professor at the University of Pennsylvania’s Wharton School.
“The consequence is that there’s not enough left in the revenue pie to fund the government’s ordinary spending…so deficits become higher in a way that’s difficult to escape,” Ms. Skinner said.
The economy has shown signs of slowing in recent months, which could crimp income and related tax revenue from companies and individuals in the coming fiscal year. Meanwhile, yields on Treasury bonds have risen as the Federal Reserve lifts interest rates to fight high inflation. That means issuing debt will be more expensive for the government.
About $9.8 trillion, or 40%, of the national debt will roll over within the next two years and so could be subject to higher interest rates, according to the nonpartisan
Peter G. Peterson
Foundation, which advocates for deficit reduction.
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How concerned are you about the deficit? Join the conversation below.
“Between the traditional imbalance between spending and revenue and increasing interest rates, which are going to be more of a factor going forward, the overall deficit is going to gradually creep up,” said Alec Phillips, chief political economist at Goldman Sachs.
The 2022 deficit figure will include a $379 billion charge for student-loan cancellations. While those costs must be accounted for in a single year by law, they will be realized over many years of smaller student debt payments.
Excluding student-loan-cancelation costs, the deficit would have been lower in the last fiscal year and expected to rise in the current one.
Republicans campaigning ahead of next month’s midterm elections have argued Democrats’ spending agenda fueled inflation, which is running near the highest rate in four decades. The Biden administration and Democrats have countered that their policies helped fuel a strong economic rebound as the pandemic receded and provided a financial buffer for families.
The Biden administration said recently-enacted laws intended to bolster the domestic semiconductor and clean-energy industries and its student-loan relief plans will increase the economy’s potential to grow. The White House pointed to a narrower deficit in 2022 as a justification for student-debt relief.
“There are definitely dynamics in fiscal year 2022 that don’t prevail in fiscal year 2023,” said Jared Bernstein, a member of the White House Council of Economic Advisers. “But if you look at our budgets, they’re carefully crafted to achieve fiscally responsible outcomes.”
However, if the recent economic slowdown tips into a recession, deficits could widen more than forecast.
A recession could mean higher government spending on stabilizers, such as unemployment benefits, said
Nancy Vanden Houten,
lead economist at Oxford Economics. She forecasts a mild recession during the first half of next year.
“We’re not looking for sharp declines in revenues or steep increases in spending, but the risks are enhanced that revenues will be weaker and stabilizers might have to kick in, given our outlook,” Ms. Vanden Houten said.
Write to Amara Omeokwe at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
A cooling U.S. economy and rising interest rates could widen the federal budget deficit, potentially undercutting the White House’s message that a shrinking budget gap under President Biden shows fiscal responsibility in a time of high inflation.
The budget deficit for the 2023 fiscal year, which began Oct. 1, is expected to hold nearly steady from the last fiscal year, at more than $1 trillion, the White House and private sector economists say.
That would mark a break from the just-ended fiscal year when a rise in revenue, particularly from individual income taxes, and reduced government spending on Covid-19 programs helped shrink the annual deficit. Higher income taxes were in part propelled by a strong labor market delivering raises to many workers.
The nonpartisan Congressional Budget Office estimates the federal budget shortfall shrank by roughly half to $1.4 trillion in fiscal year 2022, which ended Sept. 30. The Treasury Department is scheduled Friday to release its final figures for the fiscal year.
Some budget analysts say higher deficits and government debt levels carry hazards for the nation’s fiscal outlook. Running annual deficits requires the government to borrow, often from overseas investors. The debts then need to be repaid either through more borrowing, higher taxes or reduced spending. The CBO in May projected the deficit will rise in most years during the next decade and top $2 trillion in 2031 and 2032.
High deficits and borrowing could limit the federal government’s ability to respond to public needs, such as nutrition and education programs, said Christina Skinner, an assistant professor at the University of Pennsylvania’s Wharton School.
“The consequence is that there’s not enough left in the revenue pie to fund the government’s ordinary spending…so deficits become higher in a way that’s difficult to escape,” Ms. Skinner said.
The economy has shown signs of slowing in recent months, which could crimp income and related tax revenue from companies and individuals in the coming fiscal year. Meanwhile, yields on Treasury bonds have risen as the Federal Reserve lifts interest rates to fight high inflation. That means issuing debt will be more expensive for the government.
About $9.8 trillion, or 40%, of the national debt will roll over within the next two years and so could be subject to higher interest rates, according to the nonpartisan
Peter G. Peterson
Foundation, which advocates for deficit reduction.
SHARE YOUR THOUGHTS
How concerned are you about the deficit? Join the conversation below.
“Between the traditional imbalance between spending and revenue and increasing interest rates, which are going to be more of a factor going forward, the overall deficit is going to gradually creep up,” said Alec Phillips, chief political economist at Goldman Sachs.
The 2022 deficit figure will include a $379 billion charge for student-loan cancellations. While those costs must be accounted for in a single year by law, they will be realized over many years of smaller student debt payments.
Excluding student-loan-cancelation costs, the deficit would have been lower in the last fiscal year and expected to rise in the current one.
Republicans campaigning ahead of next month’s midterm elections have argued Democrats’ spending agenda fueled inflation, which is running near the highest rate in four decades. The Biden administration and Democrats have countered that their policies helped fuel a strong economic rebound as the pandemic receded and provided a financial buffer for families.
The Biden administration said recently-enacted laws intended to bolster the domestic semiconductor and clean-energy industries and its student-loan relief plans will increase the economy’s potential to grow. The White House pointed to a narrower deficit in 2022 as a justification for student-debt relief.
“There are definitely dynamics in fiscal year 2022 that don’t prevail in fiscal year 2023,” said Jared Bernstein, a member of the White House Council of Economic Advisers. “But if you look at our budgets, they’re carefully crafted to achieve fiscally responsible outcomes.”
However, if the recent economic slowdown tips into a recession, deficits could widen more than forecast.
A recession could mean higher government spending on stabilizers, such as unemployment benefits, said
Nancy Vanden Houten,
lead economist at Oxford Economics. She forecasts a mild recession during the first half of next year.
“We’re not looking for sharp declines in revenues or steep increases in spending, but the risks are enhanced that revenues will be weaker and stabilizers might have to kick in, given our outlook,” Ms. Vanden Houten said.
Write to Amara Omeokwe at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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