US Deficit Jumps by $700 Billion

The United States government has spent almost $1 trillion more than it has taken in income for just the past seven months of the 2023 fiscal year which starts in October.

The Congressional Budget Office (CBO) said $2.68 trillion was taken in taxes, but $3.61 spent, a shortfall of $928 billion.

In seasonally adjusted terms, accounting for timing shifts because some payments were due on weekends, the deficit was $991 billion for the period of October to April, CBO said.

That’s $696 billion more than for the same period last year when the deficit came at $360 billion, making this one of the biggest jump in deficit spending.

The huge jump is both due to a fall in taxes and increased costs with interest payments rising by 40%.

The US government spent almost $400 billion on just interest payments for the first seven months of the year, not far off from as much as it pays for the army.

It also paid $35 billion for the bank collapses in March and April, which the Federal Deposits Insurance Corporation (FDIC) is to recoup through higher premiums for banks.

The tax intake on the other hand decreased by $300 billion, even though president Joe Biden has raised taxes on the top richest earners by 5%.

That gave a one off half a trillion boost last year as billionaires sold stocks en mass to avoid the higher tax rate, and now any such additional income may be volatile depending on market cycles.

Another big reduction in income is from the Federal Reserve Banks which gave $71 billion to the Treasury last year from profits.

This year so far however it gave only $1 billion as Fed sits on huge bond losses, suggesting a draught from Fed may well continue for potentially years as it covers the current hole from future profits.

The banks bailout, the Fed bailout of sorts and interest payments therefore have cost half a trillion in just seven months, accounting for the majority of this deficit.

While the bank crisis has stabilized for now, the lack of receipts from Fed and higher interest payments will continue for probably at least two years.

At the current debt level of $31.4 trillion, that means the government will pay $1.13 trillion a year on just interest at the rate of 3.6%, which the market is currently charging for ten year bonds.

That’s quite a bit more than it pays for the army, or social security, two of its biggest expenses by far.

Those however have some utility, while interest payments are effectively burned money, and amounts to taking a huge sum from the public to give it to banks – which are some of the biggest bond holders – or to China which also has a significant amount of US bonds.

Congress therefore is currently in a deadlock as Republicans have put a pause on more borrowing to have a fresh look on spending.

The House has passed a bill called the Limit, Save, Grow Act of 2023 which CBO says would reduce the deficit by $4.8 trillion over the next decade.

So by half a trillion a year, which would bring the budget to what it was prior to the interest rate rises as that half a trillion would be used to cover the half a trillion increase in interest rates.

With this budget therefore, a deficit would continue, which means the government would keep borrowing more, just at the pre-2020 rate rather than at the currently accelerated rate.

The savings from this budget by the House would be mainly due to caps on discretionary spending, $3 trillion over the decade, a one off circa $400 billion by suspending the student loans forgiveness program, and half a trillion by savings in regards to debt servicing.

The Committee for a Responsible Federal Budget, which is seen as politically neutral, called it a “a reasonable bill that would raise the debt limit, reduce deficits, and slow the growth of our national debt.”

The Democrat partisan economist Paul Krugman, however, has a different view, stating:

“The bulk of the claimed deficit reduction comes from imposing a 10-year cap on discretionary spending; by 2033 this would mean cutting spending 24 percent below current projections.

Which programs would be cut? If some things like veterans’ benefits were exempted, would the immense cuts required elsewhere even be possible? Republicans won’t say.”

Those are fair questions, but CBO says “the caps would rise from $1.471 trillion in 2024 to $1.609 trillion in 2033.”

So it is still an increase, although perhaps below the inflation rate. But there is a criticism that can be made for the budget as it aims to remove tax incentives in regards to renewables, as well as “certain other zero-emission sources; residential and commercial energy efficiency; advanced energy manufacturing; and electric and alternative fuel vehicles.”

This would save about half a trillion over the decade, or $50 billion a year, with an easy compromise there being removing subsidies in regards to buying electric vehicles as their costs are now competitive, while leaving the rest because of geopolitical sovereignty and because no one likes dirty air.

So it is not an easy budget, but if this is their starting point, they clearly are being reasonable.

It is for the other side to say now, including Krugman, how the huge deficit can be addressed, especially considering that higher taxes at these levels might have the opposite effect and may bring less income as perhaps we are seeing from this seven month budget.

One brilliant idea the Biden administration had was to politicize climate change by proposing a 30% tax on bitcoin mining based on the argument that even if miners themself use renewable energy, that energy is not available to others to use who have to use dirty energy.

Well, those others can go out and buy their own solar panels, with the use of the climate change argument here being dangerous in our view as it clearly has nothing to do with climate change because if it did, it would be an industry wide policy rather than just miners.

The effect of that politicization is Republicans now want to remove tax incentives on clean energy because political football, making the American public the clear loser of this selfish rhetorical utilization of serious matters like clean air, or climate change.

That tax would barely raise $4 billion anyway, while potentially losing unknown amounts of not just money as some of bitcoin mining takes out flared gas, which is hugely damaging to the environment; the bitcoin industry can stabilize the grid without the need for gas and oil based power stations because the miners using renewable solar or hydro can be shut off in minutes; and more importantly no one can predict just how bitcoin mining demand might develop both renewable energy and innovation in energy more widely.

One of the effects of the crypto based high demand for GPUs, for example, has been both to increase their computing power and to lower costs, which has contributed to artificial intelligence becoming publicly available a lot sooner than anyone thought.

The tax route therefore can only go so far, but whichever way, the challenge is unsurmountable without proper growth, and on that we’re not hearing any vision from either side when the election will probably be decided on that very point.

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• Source: https://www.trustnodes.com/2023/05/09/us-deficit-jumps-by-700-billion