It's a little unnerving that we're seeing record budget deficits, soaring government debt, and steadily rising interest rates--all at the same time.
How much of this can be undone? And how did we get here? The short answer is, government spending remains notably higher than it was pre-Covid, while revenues are more or less the same. And the fact that both deficits and debt are higher than in the past while our borrowing costs have soared means that paying interest is also taking up an increasing share of that revenue pie.
Here's what we know: the budget deficit has doubled over the past year, to $2 trillion. It would have actually been $2.3 trillion if the Supreme Court hadn't scuttled President Biden's student loan forgiveness plan. That's not only double what we ran last year ($1 trillion in fiscal 2022), it's also double what we ran pre-pandemic, in 2019.
And unfortunately, that "relatively" low deficit last year is starting to look like an aberration. We saw a surge in revenues in 2022--equaling almost 20% of GDP--thanks to strong tax collections from huge capital gains in the previous year and soaring inflation. But this year, tax revenues have fallen sharply--as well as remittances from the Federal Reserve--and revenues as a result are running just under 17% of GDP, more in line with the 17.7% historical average, according to CRFB.
The trouble is that government spending, at the same time, remains structurally higher than it was pre-pandemic. Spending is about three points higher than it used to be, at 24% of GDP. And there isn't any one "big" reason for that jump, but a broad range of increases, including higher COLAs (cost-of-living adjustments) for Social Security and Medicare. Subtract that from revenues, and that's how you end up with a deficit that is running 7.4% of GDP this year--"larger than any other year in history in which we did not face a war, recession, or other major emergency," as the Committee for a Responsible Federal Budget notes.
On top of all that, the rising cost of paying interest on our debt--which keeps growing because of these deficits--is itself also pushing spending higher, in a kind of fiscal "doom loop."
The government paid nearly half a trillion dollars in interest last year, out of roughly $6 trillion in total spending. That's double what we spent in the zero-interest-rates years of the 2010s. And CBO warns that figure is expected to keep growing, to $1.4 trillion within a decade, because the amount of debt we carry has risen so sharply (and unless rates miraculously return to near-zero levels).
To pay that cost, we either have to take it out of other spending areas, or keep running deficits that will just exacerbate the problem, or hope to somehow sharply increase revenues to much-higher-than-normal historical levels. Little wonder politicians are now calling for a new "bipartisan commission" to tackle the enormous challenge we now face. If you thought the "Simpson-Bowles" era was fun (remember "sequestration"? The "supercommittee"?)...just wait.
And so we face a looming government shutdown that, as Dan Clifton of Strategas has put it, is still just an early part of what's going to be a long and difficult new "age of austerity." No deal that would make substantive changes to this grim picture has yet come into view. And because of surging interest rates, the status quo--for all those hoping this unending shutdown and debt-ceiling drama will just "go away,-- no longer seems tenable.
The longer that yields stay around present levels, with the 10-year Treasury pushing above 4.5% this morning, the more pressing these problems become.
See you at 1 p.m!
Kelly
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