Your trusted source for the latest news and insights on Markets, Economy, Companies, Money, and Personal Finance.

Exploring the Causes Behind the Increasing Federal Deficit

America’s federal budget deficit appears to have roughly doubled over the year to $2 trillion, a surprising jump given the strength of the economy.

The deficit is the gap between how much the government spends and how much it receives in taxes. It tends to balloon during tough economic times and narrow when growth resumes, though that relationship broke under President Donald J. Trump and now President Biden.

White House officials initially predicted that the deficit would hit about $1.7 trillion in the 2023 fiscal year, which ended last month. Now the expectation is that it approached $2 trillion, excluding the effects of Mr. Biden’s student-loan plan, which was supposed to increase deficits, but was struck down by the Supreme Court. The surging deficit is a surprise given that the economy grew faster than expected over the last year.

The Treasury Department will release the official deficit figure on Friday afternoon.

Administration officials have sought to blame Mr. Biden’s predecessor for the deficit surge. They say tax cuts passed by Republicans in 2017 and signed by Mr. Trump have shrunk revenue and left the country in a more dire fiscal situation.

“This is what we believe is a MAGA-nomics deficit,” Karine Jean-Pierre, the White House press secretary, told reporters last week, using a pejorative acronym for Mr. Trump’s economic program.

It is true that Mr. Trump’s tax cuts — like those signed by Presidents George W. Bush and Barack Obama — have reduced federal tax receipts as a share of the economy. Without them, analysts agree, the deficit and the national debt would almost certainly be smaller than they are.

But the Trump tax cuts are not the only reason the deficit jumped unexpectedly last year. Federal spending isn’t to blame, either; it fell slightly from the previous year. The big driver of the increase was slumping tax revenue unrelated to the Trump cuts.

A preliminary analysis by the Congressional Budget Office suggests that federal tax receipts fell 9 percent from the 2022 fiscal year, even though the economy grew steadily, a historical anomaly that cannot be explained only by the Trump tax cuts.

“We know for sure that our deficits now are bigger than they would have been without the Trump tax cuts,” said Bobby Kogan, a former Biden budget adviser who is now senior director of federal budget policy at the liberal group American Progress in Washington.

Asked if those cuts were behind the surprise slump in tax collections last year, Mr. Kogan was less certain. “Who knows?” he said.

To understand why the deficit rose so much last year, it helps to separate the long-run pressures on the federal budget from the handful of unexpected effects that sneaked up on economists in and outside the administration last year.

The government does not collect nearly enough in taxes to fully cover the costs of federal programs. The gap is expected to grow as millions more Americans retire in the years to come, raising the costs of Medicare and Social Security.

The budget office projects that federal spending over the next decade will average about 24 percent of the country’s annual economic output. In the same period, it predicts, the government’s tax receipts will equal about 18 percent of the economy — a number that assumes many of Mr. Trump’s tax cuts will expire in 2025.

That amount has been reduced by multiple rounds of tax cuts. In the three years after Mr. Trump’s cuts passed, receipts fell by about a percentage point of gross domestic product compared with the three years before the cuts.

Mr. Biden and Democrats approved some tax increases in 2022. But in a surprise, individual and corporate tax receipts appear to have fallen in 2023 by at least two percentage points from the previous year. Administration forecasters knew the Trump tax cuts would still be in place when their estimates of tax revenues and deficit levels were included in Mr. Biden’s budget proposal early this year. Still, those forecasts were off by several hundred billion dollars.

Several one-off factors help explain that extra decline.

There was a surge in claims — and in potential fraud — for a pandemic-era tax credit meant to encourage companies to keep paying workers even if Covid-19 was hurting business. The Internal Revenue Service delayed tax-filing deadlines for millions of people affected by natural disasters, including almost everyone in California, effectively pushing some tax payments from last fiscal year into the current one. American consumers bought fewer imported goods, and customs duties fell 20 percent as a result.

Receipts also plunged for taxes on capital gains — proceeds from the sale of assets like stocks. Those receipts are historically volatile. They came in unexpectedly high in the 2022 fiscal year, helping to reduce the deficit by more than expected.

A pair of corporate tax increases that Mr. Biden signed into law in 2022, including a new minimum tax and a tax on stock repurchases, were not projected to raise enough revenue last year to offset those losses.

Outlays for defense, Social Security and other government programs appear to have been slightly lower than anticipated last year — and lower than in 2022. But one spending category went up sharply. The government spent about $711 billion last year just to pay interest on the national debt. That was nearly $200 billion more than the previous year, and $70 billion more than the budget office forecast in February. The increase is largely the product of the Federal Reserve’s aggressive raising of interest rates in a bid to tame inflation.

Federal borrowing costs have climbed in recent weeks and stoked new concerns about interest payments — and larger deficits — in the years to come. In May, the budget office predicted interest costs alone would total $10.5 trillion over the next decade.

Share this article
Shareable URL
Prev Post

Fed Chair Suggests Higher Interest Rates May Be Warranted Due to Positive Economic Data

Next Post

The Hidden Costs of Resort Fees: What You Need to Know

Leave a Reply

Your email address will not be published. Required fields are marked *

Read next
Sometimes, it’s illegal to spend money that you set aside for yourself. When you save money in many types of…
Twelve months ago, Tom Lee bet that 2023 was going to turn out just fine. While many of his peers on Wall Street…
As gold surged this year to its highest price ever, Xena Lin joined the frenzy by making monthly purchases of…
The main campus of the bankrupt San Francisco Art Institute, which is home to a beloved Diego Rivera mural, has…