In the 12 fiscal months that ended on Sept. 30, the federal deficit effectively doubled compared to 2022. And the fact that Washington would run such high deficits in comparatively good economic times speaks to both the structural problems driving those deficits and the danger those structural flaws pose to our nation’s fiscal future.
If you thought Washington had any sense of fiscal discipline (and really, who would ever put the words “Washington” and “sense” in the same sentence?), the facts on the recently concluded fiscal year should put that notion to rest.
Unconstitutional ‘Loan Forgiveness‘
Many headlines reported that the federal government ran only a $1.7 trillion deficit last fiscal year. But the effective deficit was higher, and using a smaller number in headlines obscures the reality of our deficit problem.
The accounting issue behind the discrepancy involves the government giveaway in the form of student “loan forgiveness,” which President Biden proposed last year. In June, the Supreme Court struck down this program as unconstitutional. However, the federal government recorded “savings” on its books of $321 billion because the Biden administration could not spend this money on their giveaway.
From an accounting standpoint, Washington ran a roughly $1.4 trillion deficit in 2022 and a $1.7 trillion deficit this year. But if you consider the $321 billion it “spent” when the Biden administration first announced its “forgiveness” plan in 2022 and the $321 billion it “saved” when the Supreme Court struck that plan down, the federal government actually ran a deficit of $1 trillion in 2022 which jumped to $2 trillion in fiscal 2023.
Removing the accounting adjustments for a plan that (thankfully) never went into effect reveals just how much the deficit has rebounded under Joe Biden’s watch.
Inflation Means Higher Spending
The Department of the Treasury’s press release regarding the budget numbers attempted to highlight that revenue declined between 2022 and 2023. The Biden administration views this decline as a sign for Congress to raise more taxes to lower the deficit.
But the massive revenue spike in 2022 was in many ways a one-off sparked by monetary conditions. The Federal Reserve’s policy of printing money throughout the Covid pandemic created bubbles in all sorts of asset classes, from the stock market to cryptocurrencies and much more. When people sold their (artificially inflated) assets, they incurred capital gains taxes, which provided a temporary boon to the Treasury.
But this boon came with a downside as Federal Reserve money-printing and congressional over-spending stoked inflation, causing federal spending to rise and exacerbate our deficit problems.
The Treasury admits that, excluding the student “loan forgiveness” issue discussed above, non-interest outlays rose from 21.4 percent of the economy in fiscal year 2022 to 21.6 percent of GDP in fiscal 2023. That increase came in large part because higher inflation led to more spending on inflation-indexed programs, such as a higher cost-of-living adjustment for Social Security recipients.
Fiscal Danger Ahead
Inflation-increased spending portends major fiscal problems ahead. The Treasury report claimed that the deficit increased from 5.4 percent of the economy’s GDP in 2022 to 6.3 percent of GDP in 2023. But because the latter number includes the phony savings from the striking down of “loan forgiveness,” it understates the depth of our deficit problem.
For the federal government to run a deficit approaching 7 percent of its economy during a time of relative economic growth demonstrates a dangerous level of fiscal recklessness.
Ironically, one of the other big sources of increased spending came from higher interest payments, reflecting both higher federal debt levels overall and the higher interest rates the Treasury is having to pay to those who own federal debt.
Washington is rapidly approaching the point at which interest costs will become one of the largest elements of the federal budget. Such a scenario amounts to generational theft — the tax dollars of young Americans being used for little else than to pay the bills their parents and grandparents incurred.
Frittering away the nation’s future is the worst kind of “gift” Americans can give their descendants. Yet without significant reform — and soon — the next generation will almost certainly face a financial future bleaker than that of their parents.