by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The federal deficit doubled in fiscal year 2023, and the bond market is sounding the alarm about fiscal irresponsibility. But Washington isn’t listening.
The deficit for 2023, reported at $1.7 trillion by the Congressional Budget Office, was really about $2 trillion (or more than twice the $1 trillion recorded a year earlier). The reason for the $300 billion discrepancy lies in Washington accounting conventions. The government counted the Biden administration’s illegal and unconstitutional student-loan program as part of last year’s spending, and then counted the Supreme Court’s rescission of that program as though it were savings.
During his State of the Union speech, and on many other occasions, President Biden claimed credit for “the largest deficit reduction in American history.” In reality, what had happened was that in 2022, spending retreated from its Covid-era peak, as pandemic-related spending measures expired. But now he can no longer make even that preposterous claim.
This year’s economic and political circumstances should not have led to a doubling in the deficit. Economic growth has been slow but positive, the unemployment rate is very low, the pandemic and its extra spending is in the past, no major new domestic programs were created, and U.S. forces aren’t fighting any major wars. Revenue is down from the record high of 2022, but it’s still high compared with the long-run average, as a share of GDP.
Given those fundamentals, the bond market is spooked. Fitch downgraded U.S. debt in August, citing long-run fiscal problems and Congress’s unwillingness to deal with them. When it made that announcement, the yield on a ten-year Treasury bond was about 4 percent. Today, it’s closer to 5 percent. The yield on a ten-year Treasury has been rising gradually since mid May, when it was around 3.5 percent.