The US Treasury faces challenges and risks stemming from high public debt and ongoing budget deficits.
In 2022, the U.S. federal revenues reached a total of $4.9 trillion. However, projections suggest a slight decline to $4.8 trillion in 2023, marking a 2% decrease. This drop is expected despite the share of revenues in relation to the GDP, 19.6% in 2022, remaining above the 50-year average of 17.4%.
US Treasury Budget on May 2023. Source: CBO
The Evolution of Revenue Streams
Looking closer, these fluctuations in the overall revenues result from predicted shifts in various sources of revenues. First, individual income tax receipts are projected to reduce in relation to GDP through 2025. The anticipation is that the collections from taxes on capital gains and other sources will fall. However, a projected increase is foreseen from 2025 to 2027 due to planned changes in tax law, including an increase in most tax rates.
Secondly, corporate income tax receipts are predicted to consistently decrease in relation to GDP from 2023 to 2033. This reflects the combined effects of upcoming alterations in tax regulations. The third source of revenue, Federal Reserve remittances to the Treasury, is anticipated to remain close to zero from 2023 to 2027 due to the rise in short-term interest rates. However, a significant increase is expected by 2028.
Lastly, excise tax receipts may rise in 2024 due to recent legislative changes, but will likely decline in relation to GDP in the subsequent years.
The Long-Term Fiscal Outlook
Looking beyond the next decade, the U.S. fiscal outlook appears challenging. The Congressional Budget Office’s (CBO) long-term projections indicate that budget deficits will grow in relation to GDP due to a surge in outlays. These outlays, driven by rising interest costs and increased Medicare spending, will outstrip revenue growth. This trend could significantly increase federal debt over the next three decades, reaching a projected 195% of GDP by 2053.
Uncertainties in Budget Projections
While the CBO’s baseline budget projections aim to highlight the potential trajectory of federal spending, revenues, deficits, and debt under current laws, they are not immune to uncertainties. Any changes to laws, especially those related to fiscal policies, could significantly alter budgetary outcomes.
J. Biden canceled debt negotiations with Republicans.
The Treasury has a few weeks left of cash.
Iraq is ready for a new exchange rate.
The UST Notes (Republic Finance)
How can the US Treasury escape financial doom?
Mark over its gold reserves netting them 500+ billion. 🤑
— Ariel (@Prolotario1) May 13, 2023
Even if federal laws remain unchanged for the next decade, the actual budgetary outcomes could differ from the CBO’s baseline projections due to unexpected changes in economic conditions and other factors affecting federal spending and revenues. Variables like interest rates, inflation, and productivity play a pivotal role in shaping outlay and revenue projections.
Moreover, administrative actions and court rulings could also cause deficits to deviate from the projections. For instance, the projection of the deficit in 2023 carries significant uncertainty, potentially affecting both revenues and outlays. Based on past projections, the average absolute error in revenue projections has been 0.5% of GDP, while outlays have had a smaller average absolute error of 0.3% of GDP.
The CBO’s deficit estimate has increased by $130 billion (or 9%) for 2023 and by $51 billion (or less than 1%) for the 2024–2033 period since it published its baseline projections in February. The current projections predict that public debt will reach $46.7 trillion by the end of 2033, amounting to 119% of GDP.
The Impact of Administrative Actions
The two most significant technical changes in the CBO’s current projections are due to administrative actions related to Medicare Advantage and student loans.
The policy changes concerning payments to Medicare Advantage Plans could decrease Medicare outlays by $308 billion over the 2023–2033 period. This reduction results from the Centers for Medicare & Medicaid Services (CMS) deciding to eliminate the double-counting of diagnoses in its risk-adjustment model. The move aims to improve the accuracy of risk adjustment in the Medicare Advantage program.
On the other hand, changes in the Department of Education’s loan management and collection processes have led to an increase in the estimated cost of federal student loans. The CBO expects a $211 billion surge in outlays over the 2023–2033 period. This uptick is primarily attributed to a change in the treatment of defaulted loans, thus increasing the costs of disbursing and forgiving student loans.
Economic Changes and Their Consequences
Economic factors have also contributed to changes in the CBO’s baseline projections. Revised economic forecasts, for instance, have resulted in a $78 billion decrease in estimated outlays and a $47 billion increase in estimated revenues over the 2023–2033 period.
Specifically, lower inflation projections have led to a reduction in the estimated cost of federal benefits and services indexed to inflation. Simultaneously, it has resulted in lower projections for nominal GDP, reducing the forecast for revenues.
Recent legislation has also played a part in the revised projections. The CBO now expects a $54 billion increase in outlays over the 2023–2033 period due to enacted legislation.
Most notably, the Bipartisan Infrastructure Investment and Jobs Act could increase outlays by $58 billion over the decade. This legislation aims to support critical infrastructure across the country, providing funds for transportation, broadband, and water systems, among other areas.
The Ramifications for Public Debt
The implications of these revenue and spending projections for public debt are significant. The CBO predicts that the federal debt held by the public will exceed the size of the GDP for much of the next decade. By the end of 2033, experts project the debt to be 119% of GDP, a historically high level.
This trajectory of increasing debt could have serious economic consequences. High levels of debt can crowd out private investment, slow economic growth, and increase the risk of a fiscal crisis.
Risks and Implications of the Current Fiscal Outlook
The current fiscal outlook, marked by high public debt and persistent budget deficits, carries significant risks and implications. High levels of public debt are a cause for concern as they can increase the cost of borrowing for the government and private sector alike, potentially leading to higher interest rates. This, in turn, can crowd out private investment, inhibiting economic growth and job creation. Moreover, the heavy debt load can limit the government’s ability to respond to future crises, whether they are economic, public health, or national security-related.
Further, the sustained budget deficits mean that the government is spending significantly more than it collects in revenues, which could lead to an even larger debt burden in the future. This fiscal imbalance could force the government to make tough choices, potentially leading to cuts in vital services or increases in taxes, which could have detrimental effects on the economy and the well-being of the public.
The risks are not just domestic. The U.S. economy plays a pivotal role in the global financial system, and any signs of fiscal instability could have international repercussions. It could affect the dollar’s status as the world’s reserve currency and potentially trigger a global economic downturn.
1 month US Treasury yield jumps as US at "significant risk" of default in first two weeks of June if Congress doesn’t address the debt ceiling, CBO said. BUT US can avoid default in July if Treasury can make it through June cash crunch. https://t.co/RjjgR5nTvY pic.twitter.com/vNEHGQQMMG
— Holger Zschaepitz (@Schuldensuehner) May 12, 2023
Therefore, the projected fiscal outlook demands serious attention from policymakers. They must craft strategic, balanced fiscal policies that address current needs while ensuring the long-term financial health of the nation, thus mitigating these significant risks.
The Need for Sustainable Fiscal Policies
In the face of these challenges, the need for sustainable fiscal policies becomes even more urgent. Policymakers must balance the needs of the present with the long-term health of the nation’s economy.
Without changes to current policies, the fiscal outlook for the U.S. remains troubling. But with informed and strategic decision-making, it’s possible to alter this course and secure a sustainable fiscal future for the country.
