Quiver Quantitative - The US economy experienced an impressive year, outpacing many forecasts. However, in stark contrast, the underlying federal deficit notably expanded, drawing attention to an alarming fiscal path and likely intensifying partisan budget debates in Washington. The deficit for the fiscal year through September ascended to $2.02 trillion, once adjustments excluding the effects of President Joe Biden's student-loan forgiveness program are considered—a $1.02 trillion leap from the preceding year. This significant gap has ignited concerns among economists, politicians, and credit rating agencies, simultaneously impacting the rise in yields on long-term US Treasuries.
Although political discourse about spending persists, the primary catalyst for the deficit enlargement in 2023 is predominantly on the revenue front, largely attributed to the rapid surge of inflation—a subject of fervent partisan debate. When measured as a percentage of the GDP, the deficit's adjusted growth represents one of the three most profound increases since 1950, with the other two instances occurring during years of crises: 2009 and 2020. Noteworthy is the fact that 2023 witnessed substantial economic progression, adding more than 3 million roles to the US employment landscape.
Several elements are at play in the ballooning deficit. Accounting adjustments concerning the student-loan forgiveness program, a precipitous $456 billion descent in individual tax receipts due to financial market shifts, and inflation's repercussions on entitlement programs such as Social Security and Medicare, significantly impact the situation. Additionally, modifications in the Federal Reserve's fiscal procedures, inflationary pressures on bonds, and varied factors, including defense expenditures, further strain the deficit.
Peering into the future, the deficit for the upcoming fiscal year may witness a decline, fueled by the positive performance of financial markets in 2023. Nonetheless, challenges loom large. Contributions from the Federal Reserve to the Treasury are projected to be limited, and the mounting interest on the national debt will continue to weigh on the deficit. As political confrontations mount with the impending expiration of former President Donald Trump's tax incentives in 2025, discourse surrounding the origins of the deficit and potential resolutions will come to the forefront.
This article was originally published on Quiver Quantitative