Annual Federal Deficit Shrinking, But Urgent Action Needed
Introduction:
The Congressional Budget Office (CBO) has projected that the federal deficit for fiscal year 2024 will reach $1.9 trillion, which is $400 billion higher than its previous estimate. This increase is due to unrecorded costs such as student loan debt cancellations and assistance to other countries. The deficit for the first nine months of the fiscal year was $1.268 trillion, a decrease of 9 percent from the previous year. However, urgent action is needed to address the growing fiscal deterioration.
Decrease in June Deficit:
In June, the federal government’s budget deficit was $66 billion, down 71 percent from the previous year. This decrease was caused by various calendar effects that allowed tax receipts to grow and outlays to fall. Tax receipts increased by 11 percent year over year, totaling $466 billion, fueled by deferred tax payments from areas affected by natural disasters. On the other hand, outlays declined by 18 percent from June 2023, amounting to $532 billion.
Revenue and Spending Levels:
Fiscal year to date, revenues have increased by 10 percent to $3.754 trillion, while outlays have increased by 5 percent to $5.022 trillion. The largest spending items were Social Security, education, health, and national defense. Notably, net interest payments in June amounted to $81 billion and have skyrocketed by 33 percent to $682 billion compared to last year. In fact, 44 percent of individual income taxes collected in June were dedicated to interest charges.
Long-term Fiscal Situation:
The Committee for a Responsible Federal Budget (CRFB) reported that the 12-month rolling deficit reached $1.6 trillion, which is $154 billion lower than the previous 12-month period. However, the CRFB warns that the gap between spending and revenues continues to contribute to the deteriorating fiscal situation. They predict that the national debt will rise from 97.3 percent of GDP in fiscal year 2023 to a record 106.2 percent of GDP by 2027 and 122.4 percent by the end of the decade. Lawmakers need to take immediate and long-term action to address this issue.
CBO’s Revised Deficit Outlook:
The CBO revised its deficit outlook for fiscal year 2024, projecting a deficit of $1.9 trillion, an increase from last year’s $1.7 trillion deficit. The larger projection is due to unrecorded costs such as student loan debt cancellations and assistance to other countries. CBO Director Phillip Swagel emphasized the mounting fiscal risks, including ballooning interest payments and higher debt. He estimates that spending would need to be cut by 7 to 8 percent just to stabilize the debt.
Managing Debts and Deficits:
To manage the growing debt and rising deficits, the Treasury has issued about $2 trillion in new short-term debt securities (T-bills) over the past year. However, there has been tepid demand for both short- and long-term debt securities. This poses a problem as the share of outstanding T-bills as a share of total debt outstanding has risen, increasing the risk in the funding market. If the Federal Reserve cuts interest rates, there could be a diminishing appetite for Treasury bills, leading to upward pressure on short rates.
Conclusion:
While the annual federal deficit is shrinking, urgent action is needed from lawmakers to address the growing fiscal deterioration. The projected deficit for fiscal year 2024 has increased to $1.9 trillion, highlighting the need for immediate and long-term solutions. Additionally, managing debts and deficits poses challenges as demand for short- and long-term debt securities remains tepid. It is crucial for policymakers to take proactive measures to stabilize the debt and ensure a sustainable fiscal future.
