The US government ran an $85 billion budget deficit in December, according to the Monthly Treasury Department Statement. That was much lower than November’s massive $248.5 billion shortfall, but don’t be deceived by the drop. December is typically a low deficit month. The relatively big shortfall indicates the federal government is on a trajectory to blow past the $1.38 trillion fiscal 2022 deficit.
The December 2022 deficit was 299% larger than the December 2021 shortfall ($21.3 billion). In fact, with the exception of the pandemic year (2020), this was the biggest December deficit since 2011, when the US government was still trying to stimulate the economy out of the 2008 recession.
This is bad news for the Federal Reserve as it tries to raise interest rates and shrink its balance sheet to fight price inflation.
With an additional $85 billion piled onto the deficit in December, the federal government closed out the first quarter of fiscal 2023 (the fiscal year begins Oct. 1) with a $421.4 trillion budget shortfall.
After a big drop in November, government receipts rebounded to $454.9 billion in December. This may seem like good news, but that was a 7% decline in revenue from December 2021.
Uncle Sam was flush with cash in fiscal 2022. The Treasury took in $4.9 trillion. According to a Tax Foundation analysis of Congressional Budget Office data, federal tax collections were up 21% in the 2022 fiscal year that ended on Sept. 30. Tax collections also came in at a multi-decade high of 19.6% as a share of GDP.
Individual income tax receipts are projected to decline as a share of GDP over the next few years because of the expected dissipation of some of the factors that caused their recent surge. For example, realizations of capital gains (profits from selling assets that have appreciated) are projected to decline from the high levels of the past two years to a more typical level relative to GDP. Subsequently, from 2025 to 2027, individual income tax receipts are projected to rise sharply because of changes to tax rules set to occur at the end of calendar year 2025. After 2027, those receipts remain at or slightly below the 2027 level relative to GDP.”
Meanwhile, government spending continues on a steady upward trajectory. The Biden administration continues to spend around half a trillion dollars every single month, blowing through another $539.9 billion in December.
There is no indication that the spending freight train will slow down any time soon. Congress recently passed a $1.7 trillion omnibus spending bill that increased spending by about $1.5 billion over fiscal 2022.
Of course, this is only one component of federal expenditures. The US government is still handing out COVID stimulus money, and in March 2021, Congress approved $1.9 trillion in spending to address the pandemic. Earlier this year, it passed the euphemistically named “Inflation Reduction Act.” Meanwhile, the US continues to shower money on Ukraine and other countries around the world. All of that spending will pile on top of this most recent allocation of funding.
On top of increased spending, rising interest rates will push the deficits up even more. According to an analysis by the New York Times, net interest costs have risen by 41% over the past calendar year. According to the Peterson Foundation, the jump in interest expense was larger than the biggest increase in interest costs in any single fiscal year, dating back to 1962.
If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
The US government has once again run up against the debt ceiling. The debt won’t increase much until Congress ultimately lifts that ceiling. After that, we will likely see another big surge in the national debt.
According to the National Debt Clock, the debt-to-GDP ratio stands at 121.5%. Despite the lack of concern in the mainstream, debt has consequences. More government debt means less economic growth. Studies have shown that a debt-to-GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
To put the debt into perspective, every American citizen would have to write a check for $94,203 in order to pay off the national debt.
A Big Problem for the Fed
The soaring national debt and the US government’s spending addiction are big problems for the Federal Reserve as it battles price inflation.
As you’ve already seen, the push to raise interest rates is putting a strain on Uncle Sam’s borrowing costs. But there is an even bigger problem. The Fed can’t slay monetary inflation — the cause of price inflation — with rate cuts alone. The US government also needs to cut spending.
This is why I keep saying the cooling trend in price inflation is transitory.
The US government can’t keep borrowing and spending without the Fed monetizing the debt. It needs the central bank to buy Treasuries to prop up demand. Without the Fed’s intervention in the bond market, prices will tank, driving interest rates on US debt even higher.
A paper published by the Kansas City Federal Reserve Bank acknowledged that the central bank can’t slay inflation unless the US government gets its spending under control. In a nutshell, the authors argue that the Fed can’t control inflation alone. US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.
Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.”
This clearly isn’t in the cards.
Something has to give. The Fed can’t simultaneously fight inflation and prop up Uncle Sam’s spending spree. Either the government will have to cut spending or the Fed will eventually have to go back to creating money out of thin air in order to monetize the debt.
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