The Biden administration's budget deficit in the 2023 fiscal year is as high as $1.695 trillion. This is the third largest deficit in American history. The only time the US government has a bigger deficit is in the COVID-19 period in 2020 and 2021.
According to the last issue of the US Treasury Monthly Report for this fiscal year, the US government ran a deficit of $170.98 billion in September. This number is more than twice the expected number. If it weren't for an accounting measure in August that revoked the student loan exemption, the deficit would have been even higher.
The budget gap in 2023 is larger than any budget gap in the Obama administration during the Great Recession, and the current economy is considered strong. Usually, a strong economy leads to a reduction in the deficit, as taxes increase. This is not the case in the 2023 fiscal year, with federal revenue decreasing by 9.3% to $4.44 trillion. US Treasury Secretary Yellen quickly attributed the huge deficit to reduced taxes and stated that this highlights the importance of the tax reform policies promulgated and proposed by President Biden.
But the biggest problem still lies in expenses. The US government's expenditure in fiscal year 2023 reached $6.13 trillion. This number has slightly decreased compared to last year's total expenditure, but the calculation of student loan exemptions has caused a deviation in the figure. If the reversal factor of student loan exemption is excluded, the Biden government's expenditure in the 2023 fiscal year is $6.46 trillion, with actual expenditure increasing by 8.8% year-on-year.
The Biden government still wants to spend more money. Biden recently proposed a $100 billion aid package for Israel, Ukraine, and other "national security" priorities. Despite the clamor of a few Republicans, there is almost no interest in Washington D.C. to address this spending issue.
The fundamental problem is not that the US government does not have enough money. The fundamental problem is that the US government spends too much money, which was and still is. Despite pretending to cut expenses, the debt ceiling agreement did not solve this problem. Even with new plans, expenses will increase. And now the expenditure has reached its highest level in history. This means that the huge budget deficit will continue to exist and the US treasury bond will continue to increase.
At the same time, the US treasury bond exceeded 33 trillion US dollars on September 15. Just 20 days later, it exceeded $33.5 trillion. In other words, the Biden administration increased its debt by $5 trillion in just 20 days. It is easy to point the finger at Biden and blame him for spending issues, but this is not a unique issue for this administration. Trump also borrowed and spent money like the well-known drunken sailor.
From the perspective of deficit, before the COVID-19 epidemic, the US government had only four deficits exceeding $1 trillion - all after the 2008 financial crisis. The government's response to the economic disaster caused by the COVID-19 epidemic has given policymakers an excuse for profligacy. Now, the Biden administration has adapted to the new situation - every year there is a deficit similar to the 2008 financial crisis.
Major issues
While interest rates have risen sharply, the US treasury bond bonds have also increased rapidly. For a government that mainly relies on borrowing to pay its bills, this is a major issue.
Interest expenses increased by 23% to $879 billion. Net interest (excluding funds transferred from government funds to trust funds) increased by 39% to $659 billion. Both of these numbers have broken records.
Reuters quoted an official from the Ministry of Finance as saying that the total interest expenditure accounts for 3.28% of GDP. This is the highest value since 2001. Net interest expenses accounted for 2.45%, the highest since 1998.
At present, the average interest rate of US debt has reached the highest level since 2011, which was 2.92% by the end of August. But this is still a relatively low level, and the debt is more than twice that of the good days of 2011.
At the same time, the average interest rate will rapidly rise. Every month, some ultra-low yield bonds mature and must be replaced with bonds with much higher yields. This means that unless interest rates decrease, interest expenses will rapidly rise.
The increase in interest rates has led to interest expenses accounting for over 35% of the total tax revenue. In other words, the US government has allocated more than one-third of its taxes to interest expenses. If interest rates remain high or continue to rise, interest expenses will quickly climb to the top three of federal spending. In a tweet, Peter Schiff, an American economist with a majority of gold, provided some background information:
In 1946, US debt accounted for 119% of GDP. In the next five years, there were four budget surpluses, and by 1953, the debt to GDP ratio had decreased to 68%, with the largest decline being 4.3% in 1948, equivalent to $1.16 trillion today. Today, reducing the same debt requires an increase in taxes and spending cuts of approximately $30 trillion by 2030.
In his podcast, Schiff referred to this as a "exploding financial time bomb". He said: "This is a deteriorating situation. We must borrow money to pay interest. Every penny of interest the government pays for debt needs borrowing. All these additional borrowing will increase treasury bond, and treasury bond must be financed at a higher interest rate."
If the size of the US treasury bond bond climbs to $40 trillion (considering the current deficit, it will not take too long), and the interest rate remains at 5% (Fed Chairman Powell said this is necessary to deal with inflation), then the annual debt interest expenditure alone will surge by about $2 trillion. This means that even if the US government balances its budget to cover all expenses minus interest expenses, the US will still face an annual deficit of $2 trillion.
Of course, the budget will not be balanced. Therefore, assuming that the federal government can maintain the current annual deficit level of approximately $1 trillion (minus interest expenses), even in this overly optimistic scenario, the Treasury's annual budget deficit will reach $3 trillion (a $1 trillion deficit plus $2 trillion interest expenses).
The most likely scenario is that spending will continue to rise and the budget deficit will also continue to increase. I don't know how high the annual deficit will be. This is a fiscal powder keg. All it needs is a match.