Is the U.S. Economy Heading for a Fiscal Freefall?

Key highlights:

• From October to December 2023, the budget shortfall hit nearly $510 billion.
• In the first quarter of fiscal 2023, expenditures exceeded revenues by $421.4 billion.
• Despite a decreased inflation rate, recent Thursday data from the Labor Department revealed a 0.3% December rise in the consumer price index, pushing the 12-month rate to 3.4%.
• The US population aged 65 and older increased from around 12% in the early 2000s to 17% in 2023, with projections suggesting a further surge to 22% by 2050.

As the United States navigates the intricate labyrinth of global affairs, it grapples with the threads of economic challenges. A lurking black spider has stealthily infiltrated the economic affairs of the nation, spinning its malevolent threads across international boundaries. Shockingly, amidst its financial challenges, the U.S. has found a way to contribute to the turmoil in the Russia-Ukraine conflict by channeling funds, casting a shadow over its purported commitment to global peace. Furthermore, the mysterious arachnid’s influence on the Middle East, particularly its support for Israel, raises doubts about the integrity of its diplomatic decisions.

The Treasury Department, on 11 January, disclosed that the U.S. government added nearly half a trillion dollars to its deficit in the initial quarter of the fiscal year. From October 2023 to December 2023, the budget shortfall reached nearly $510 billion. December alone witnessed a deficit of $129.4 billion, marking a 52% increase from the previous year. This surge in the deficit propelled the total government debt beyond $34 trillion for the first time.

In comparison to the previous year, which concluded with a deficit of $1.7 trillion, 2024 is on a more accelerated trajectory. During the first quarter of fiscal 2023, the disparity between expenditures and revenues amounted to $421.4 billion. Unadjusted, this represents an $89 billion uptick between fiscal 2024 and the preceding year.

Adjusted for calendar factors, the Treasury Department noted a $97 billion change between the two years. December’s deficit surpassed the previous year by over $34 billion, fueled by higher Social Security payments and increased interest costs. If this current pace persists, 2024 is poised to conclude with a deficit just surpassing $2 trillion.

Biden’s Inflation Reduction Act Falls Short as Expenditures Soar

Budget receipts saw an uptick over the specified period, buoyed by the collection of both individual and corporate taxes, as indicated by the Treasury Department. This occurred as deferred taxes related to the pandemic came due for various regions in the country, as disclosed by a Treasury official during a call with reporters.

However, expenditures experienced a more substantial increase, particularly with a $78 billion surge in interest on the public debt over the three-month span compared to the previous year.

In summary, disbursements managed by the Treasury escalated by $54 billion. Despite the assurances from the Biden administration that the Inflation Reduction Act would not only lower prices but also significantly reduce the deficit by “hundreds of billions,” the deficit continued to accumulate.

Although the inflation rate has decreased, recent data from the Labor Department on Thursday revealed a 0.3% rise in the consumer price index for December, pushing the 12-month rate to 3.4%. This figure surpasses the Wall Street consensus and exceeds the Federal Reserve’s 2% target.

Given the elevated interest rates due to the Federal Reserve’s efforts to combat inflation, the government faced substantial financing costs in 2023, amounting to nearly $660 billion. Concurrently, the debt-to-gross domestic product ratio rose to 120% in the third quarter of 2023.

Economic Shocks and Policy Shifts Propel Federal Debt to New Heights

Treasury records also show heightened expenditures in military initiatives and within the Social Security Administration during the quarter, resulting in a cumulative spending of $1.6 trillion.

Over the past two decades, negative economic shocks and policy changes have altered the current and projected levels of federal debt, pushing them to higher thresholds. The 21st century in the United States has witnessed two substantial adverse economic shocks — the profound and protracted Great Recession triggered by the 2007 global financial crisis and the abrupt economic downturn following the onset of the COVID-19 pandemic in early 2020.

If the slated expiration of certain provisions from the 2017 tax cuts is averted, the anticipated trajectory of tax revenues would shift downward by an estimated $400 billion to $500 billion annually in the late 2020s and early 2030s.

Another factor is the percentage of the US population aged 65 and older rose from approximately 12% in the early 2000s to 17% in 2023, with projections indicating a further surge to 22% by 2050. Coping with the expanding elderly demographic will necessitate substantial federal support for both income and healthcare.

The Congressional Budget Office (CBO) foresees that, under existing policies, Social Security outlays will climb by nearly 1% of GDP and spending on major federal healthcare programs, including Medicare, will escalate by 3% of GDP by 2053. Consequently, spending on Social Security and federal healthcare programs is projected to constitute 15% of GDP by 2053, propelling the primary deficit higher.

The Thorny Path to Addressing Escalating Federal Debt

Several policy changes that could contribute to placing the debt on a sustainable trajectory come with drawbacks, necessitating thoughtful decision-making. Numerous federal spending programs fulfill crucial roles, such as stimulating economic growth, enhancing economic mobility, alleviating hardship, and safeguarding national security.

Implementing substantial tax hikes might face resistance, and certain adjustments could potentially result in reduced work, savings, investments, and innovation. Managing the challenges posed by high and escalating federal debt is feasible from an economic standpoint. Policymakers must judiciously assess the economic tradeoffs involved in making necessary adjustments to both spending and taxes.

The most formidable barrier to tackling the issue of high and increasing federal debt may be rooted in politics. Popular commitments to safeguard key federal spending programs or refrain from tax hikes may conflict with the imperative to establish a sustainable budget.

How can U.S policymakers strike a balance between maintaining crucial federal spending programs and addressing the need for fiscal sustainability?)

As the United States stands at the intersection of economic tradeoffs and political imperatives, policymakers face the delicate task of navigating these challenges with caution. The crucial element lies in a careful assessment of the equilibrium between making necessary spending adjustments and implementing tax measures. It’s essential to acknowledge that the most significant impediment to achieving fiscal sustainability often emanates from the intricate dynamics of politics. To secure a fiscal future that is both sustainable and resilient, the nation must skillfully maneuver through the complex junction of economic prudence, social responsibility, and the pragmatic considerations of political realities.