Oct 21, 2022 4 min read Business

US Annual Deficit Cut in Half while Risks Continue from Slowing Economy

Largely due to the expiration of pandemic-era spending, the country's annual deficit falls by $1.4 trillion from the year before as rising interest rates and a slowing economy bring uncertainty.

The Biden administration said Friday that the federal deficit fell in half from the year before, as Washington girds for new battles over taxes and spending with interest rates rising and Republicans expected to take back at least one branch of Congress in the midterm elections, reports the Washington Post.

"Today’s joint budget statement provides further evidence of our historic economic recovery, driven by our vaccination effort and the American Rescue Plan. It also demonstrates President Biden’s commitment to strengthening our nation’s fiscal health," Treasury Secretary Janet L. Yellen said in a statement. "President Biden’s recently enacted economic plan will build on the economic gains of the past two years."

"It is terribly disingenuous for the White House to take credit for reducing the deficit simply because temporary pandemic spending expired on schedule," said Brian Riedl, senior fellow at the Manhattan Institute, a libertarian-leaning think tank, and former chief economist to Sen. Rob Portman (R-Ohio). "Especially when they had helped drive up the deficit with the American Rescue Plan."

Biden aides tout plunging deficit as GOP prepares for spending fights (Washington Post)

Excerpt from the Washington Post: The Treasury Department said the annual deficit had plummeted from $2.8 trillion in 2021 to roughly $1.4 trillion in 2022 — a decline driven primarily by the expiration of trillions in pandemic-era emergency spending. The gap between revenue and spending also shrunk in part due to stronger-than-expected tax receipts, as a booming U.S. economy and large corporate profits helped bring in additional funds to federal coffers. While President Biden is eager to tout the shrinking deficit, conservatives point out that it dropped relative to last year in large part because of the end of large spending programs he approved. The debates over the deficit will be further intensified by rising interest rates, which dramatically push up the cost of federal borrowing.

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According to Bloomberg, former Treasury Secretary Lawrence Summers said that policy makers in the US and elsewhere should heed the fiscal lessons from the UK’s recent crisis, and not assume Britain’s troubles were unique.

"That would be a real mistake" to conclude that other countries wouldn’t end up confronting similar challenges, Summers told Bloomberg Television’s "Wall Street Week" with David Westin. The first lesson from the UK is "that things can change extraordinarily fast."

Summers Warns on Deficit ‘Doom Loop’ Risk, Oil Price Spike (Bloomberg)

Excerpt from Bloomberg: Governments need to pay increasing attention to their budgets, with mounting deficits alongside surging borrowing costs having the potential for shaking confidence, he said. In the US, student-loan forgiveness, emergency funding for Hurricane Ian and rising defense spending needs suggest that fiscal debates will need to be "back on the table," he said. "If your deficit projection starts to get out of control and your real interest rates start to rise rapidly, you can get into a kind of doom loop," said Summers, a Harvard University professor and paid contributor to Bloomberg Television. "We’re going to need to be watching our own fiscal projections in the United States very carefully."

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A cooling U.S. economy and rising interest rates could widen the federal budget deficit, potentially undercutting the White House’s message that a shrinking budget gap under President Biden shows fiscal responsibility in a time of high inflation, writes the Wall Street Journal.

"The consequence is that there’s not enough left in the revenue pie to fund the government’s ordinary spending…so deficits become higher in a way that’s difficult to escape," said Christina Skinner, an assistant professor at the University of Pennsylvania’s Wharton School.

Federal Deficit Shrank Last Fiscal Year, Could Widen as Economy Slows (Wall Street Journal)

Excerpt from the Wall Street Journal: The budget deficit for the just begun 2023 fiscal year is forecast to hold nearly steady at that level—and above its pre-pandemic mark—the White House and private sector economists say. In the just-ended fiscal year, federal outlays were $6.3 trillion, down 8% from the prior year, the Treasury said. That largely reflects reduced government spending on Covid-19 programs. Government revenue from taxes and other sources rose to $4.9 trillion last fiscal year, up 21% from the prior year. A strong labor market and rising wages for many workers was a driver of higher income tax collection. Budget analysts say higher deficits and government debt levels carry hazards for the nation’s fiscal outlook. Running annual deficits requires the government to borrow, often from overseas investors. These debts need to be repaid through more borrowing, higher taxes or reduced spending.

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