America’s federal budget deficit effectively doubled in the 2023 fiscal year as slumping tax receipts, rising interest rates and persistent demand for expiring pandemic relief benefits strained the nation’s finances.
The latest Treasury Department figures showed a budget deficit of $1.7 trillion in 2023, up from $1.37 trillion in 2022. Those numbers make the deficit look smaller than it actually was last year, because of an accounting mirage related to a student-loan forgiveness program that President Biden proposed last year.
That program was struck down by the Supreme Court this summer and never took effect. But the Treasury recorded it as a cost in 2022, which inflated that year’s deficit. After the court killed the program, the Treasury recorded it as savings, which artificially reduced this year’s deficit.
Those student loan effects changed the deficit figures for both 2022 and 2023. When factoring them out, the deficit jumped to $2 trillion in 2023 from about $1 trillion in 2022, administration officials confirmed in a call with reporters on Friday.
In other words, Treasury assumed it saved $300 billion in 2023, when all it really did was reverse a charge that had never existed.
Officials downplayed the increase in a news release announcing the deficit totals, focusing instead on the strength of the economy and Mr. Biden’s proposals to reduce future deficits, largely by raising taxes on high earners and corporations.
“The Biden administration continues to focus on navigating our economy’s transition to healthy and sustainable growth,” Treasury Secretary Janet L. Yellen said in the release. “As we do, the president and I are also committed to addressing challenges to our long-term fiscal outlook.”
The widening gap between what the government spends and what it earns comes at an uncomfortable moment, as the president looks to a divided Congress for aid to Israel and Ukraine amid concerns about government spending and whether the United States can afford to finance two wars.
Republicans — who helped run up big budget deficits with tax cuts and increased spending when they were in power — have begun insisting on deep budget cuts in order to reduce the federal deficit. The fact that the shortfall widened could make it even more challenging to get Congress to agree on a series of spending bills that must pass by next month in order to prevent a government shutdown.
On Friday, Mr. Biden’s administration formally asked Congress to approve more than $100 billion in emergency spending that includes military aid to Ukraine and Israel, humanitarian assistance in those countries and in Gaza, and a range of new efforts to improve America’s border security.
Ms. Yellen said this week that the United States was able to bear those costs.
“America can certainly afford to stand with Israel and to support Israel’s military needs, and we also can and must support Ukraine in its struggle against Russia,” Ms. Yellen told Sky News.
Despite growing concern in Washington and on Wall Street about the grim fiscal trajectory, lawmakers have been unable to coalesce around plans to enact meaningful spending cuts or tax increases. Dysfunction in the House of Representatives, which has been unable to elect a speaker since Republicans ousted Representative Kevin McCarthy this month, is preventing Congress from passing any legislation or short-term spending packages.
Economists and deficit hawks warn that the current borrowing path is unsustainable, especially if rates stay high for an extended period of time.
The national debt topped $33 trillion this year, and fiscal watchdogs warn that within the next three decades, the cost of interest on the debt will be the nation’s largest expenditure. The Congressional Budget Office projects that by 2053, federal debt held by the public will be 177 percent of gross domestic product.
Treasury reported on Friday that net interest on the debt increased to a record $659 billion in 2023 from $475 billion last year. The Peterson Foundation, a fiscal watchdog, noted on Friday that the $10.6 trillion in projected net interest costs over the next decade would be more than twice as much as what the U.S. has spent on interest over the last 20 years.
“I believe we’ve reached a defining moment — our fiscal affairs are completely off track,” Kent Conrad, a senior fellow at the Bipartisan Policy Center, told lawmakers on Thursday at a congressional hearing about the need for a new fiscal commission. “Rising deficits and debt are an economic and a national security concern.”
Deficits have been exacerbated this year because of many factors, including delays in collecting tax revenue as a result of extreme weather and the unexpectedly high costs of certain federal programs. For example, the Internal Revenue Service has been funneling out billions of dollars in tax refunds related to the Employee Retention Credit, a pandemic-era benefit that was recently paused because of concerns about fraud.
The Biden administration has been hoping to rely on a beefed-up I.R.S., which received $80 billion in new funding as part of last year’s climate law, to ramp up tax collections. Although the agency has had some early success in cracking down on tax evasion, it is already facing the prospect of losing about a quarter of those funds. A Congressional Budget Office report this week projected that cutting $25 billion from the I.R.S. budget would add more than $24 billion to deficits.
Biden administration officials have sought to blame rising deficits on former President Donald J. Trump, who signed a sweeping tax-cut package into law in 2017. Those cuts have reduced federal revenues and widened deficits since they were enacted, analysts agree. Some officials also acknowledge the deficit grew significantly more last year than the administration had predicted. A Congressional Budget Office analysis suggests the unexpected growth was the result of rising borrowing costs and a decline in tax revenues.
That decline is attributable to falling capital gains tax receipts, increased claims — possibly fraudulent — from a pandemic-era tax break and an I.RS. decision to delay tax filing deadlines for people in California and other states affected by natural disasters.
“The increase in the deficit last year was largely caused by a sharp fall in tax revenues, while spending on programs other than Social Security, Medicare and Medicaid actually fell slightly as a share of the economy,” said Lael Brainard, who heads Mr. Biden’s National Economic Council. “As budget analysts warned, the Trump tax cuts for the wealthy and big corporations are increasing the deficit and our national debt.”
Mr. Biden proposed more than $2 trillion in tax increases and other measures to reduce future deficits in his budget this year. He has signed two tax increases into law: a minimum tax on large corporations and a tax on stock repurchases. He has also increased funding for the I.R.S. to crack down on tax cheats and bring in more revenues. Those measures will reduce the deficit from what it would have been, but are not large enough to offset the projected overall growth in deficits in the coming years.
Some administration officials concede the president may need to propose even more expansive deficit reduction — almost certainly in the form of more tax increases on high earners and corporations — in the future if interest costs do not recede.
Top Democrats in Congress say the sharp rise in borrowing costs will embolden them to fight Republican efforts to make permanent the provisions of Mr. Trump’s tax cuts that are set to expire in 2025 — or at least the provisions that benefit high earners and corporations — and to push to enact Mr. Biden’s tax plans, which include a new tax directed at the wealth of billionaires.
“We’re in a much different interest rate environment today than we were just a year ago — about 180 degrees different,” Representative Brendan F. Boyle of Pennsylvania, the top Democrat on the Budget Committee, said in an interview.
“As we continue to bring down inflation — and all of the trends are pointing in the right direction — I am confident that you’ll see those interest rates drop, which will give us some relief when it comes to the deficits,” he added. “But there’s no question when we look at 2025, and the expiration of the Trump tax cuts, we need more revenue.”
Republicans are increasingly focused on curbing spending on social safety net programs, such as Social Security and Medicare, which are the largest and most expensive federal programs.
“It’s the mandatory spending and the entitlement programs that are really driving the debt, and that if we don’t address them we’ll truly bankrupt this country,” Representative Jodey C. Arrington of Texas, the Republican chairman of the House Budget Committee, said this week.
Despite the relative strength of the U.S. economy internationally, its long-term fiscal problems are a matter of concern for global economic policymakers.
“Fiscal policy is too loose at this point,” Gita Gopinath, the first deputy managing director of the International Monetary Fund, said in an interview last week. “We think this is the time for fiscal consolidation and to rebuild buffers.”
Ben Casselman contributed reporting.
