Debt Limit Increase & Budget Agreement

Both the House and the Senate approved the Fiscal Responsibility Act of 2023 (H.R.3746), legislation that will, among other things, increase the Federal debt limit and impose some budgetary controls. The President signed the legislation into law on June 3. 

The House approved the legislation by a vote of 314-117, with 4 Representatives not voting. The Senate approved it by a 63-16 margin, with one Senator not voting. The legislation passed both parts of Congress on a bipartisan basis.

The US Treasury will restart its processes to borrow from financial markets in order to finance a portion of Federal operations. Treasury was down to less than $25 billion in cash on hand at the beginning of June, from nearly $600 billion when the Federal debt limit was reached in January.

More on the specifics of the agreement and legislation can be found HERE.

(posted: 6-3-23)

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Latest CBO Economic Outlook

The latest economic outlook (February 15) of the Congressional Budget Office (CBO) paints a difficult federal fiscal picture for the coming decade.

In this periodically updated series, CBO provides its “baseline projections” of the federal budget and the economy over the next 10 years if current laws governing taxes and spending generally remain unchanged.

Among the key projections: federal mandatory spending will rise 47% in the coming decade driven primarily by Social Security and Medicare program growth, as well as interest on federal deb; and the budget deficit doubles in dollar terms (to $2.7 trillion) and grows as a percent of the economy (i.e., GDP) from 5.2% to nearly 7%.

All federal debt will grow from 98% of the economy to 118% over the next decade if nothing is done to adjust the current policy trajectory. Debt will explode to 195% of the economy over the next thirty years.

On the upside, inflation should be dramatically lower between this year and next year, with the Consumer Price Index dropping from a 8.0% rate last year to a 4.0% rate this year, and 3.0% rate next year.

(posted: 2-15-23)

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Federal Budget Deficit To Date - FY 2023

The Congressional Budget Office (CBO) reported in its monthly budget review for January that the Federal budget deficit (i.e., current year spending over current year revenue) totaled $459 million through January, the first four months of FY 2023.

The total was $200 million above the deficit of the same period last year (Q1 of 2022). Spending was 9% higher than last year, while revenue was 3% lower. The revenue decline was primarily due to smaller remittances from Federal Reserve banks, and spending rose primarily because of increases in both the number of Social Security and Medicare beneficiaries as well as a hefty Social Security cost-of-living adjustment (8.7%).

In addition, spending on interest payments on government borrowing increased by 41% because of increases in interest rates compared to last year, and the estimated cost of the Biden Administration’s planned student loan forgiveness program was booked in the first quarter that was the primary cause of a 33% increase in Department of Education spending.

(posted: 2-15-23)

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Very Short Debt Limit Extension

Reporting, including from RollCall (January 25), suggests that House Republican leaders are considering putting forward a very short-term, so-called “clean,” debt limit extension (i.e., an extension that does not have provisions requiring other actions) through the end of the current fiscal year (September 30).

While Republican leaders had been suggesting that any debt limit extension must have conditions that compel or implement budget cuts going forward, the leaders may be willing to enable a clean short-term extension to sync up decisions on spending cuts with end-of- fiscal-year budget decisions (i.e., decisions for the next fiscal year–FY 2024). The Biden Administration and congressional Democrats want a clean long-term extension.

While the timing is not precise, the current “extraordinary measures” of the Treasury to enable the Federal Government to pay its bills, given that the current borrowing limit has already been reached, will be fully utilized by the June timeframe. The Congressional Budget Office estimated (February) that extraordinary measures will be fully utilized sometime between July and September.

That means any clean, short term extension would enable additional borrowing only for several months.

(updated: 2-17-23)

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Federal Budget Deficit Results - FY 2022

In its Monthly Budget Review through September (October 11) the Congressional Budget Office (CBO) says that the full-year Federal budget deficit for FY 2022 totaled $1.4 trillion, which is half the level below the deficit of FY 2021.

Tax and other revenue during FY 2022 increased by $850 billion over FY 2021 (+21%), while spending/outlays were down $548 billion (-$8%). Higher revenue was attributable primarily to individual income and payroll tax revenue (+$757 million). Spending/outlay reductions were linked primarily to the wind-down in outlays related to COVID-19 pandemic relief such as temporary tax credits, unemployment benefits, and Small Business Administration loans.

Still, spending on mandatory federal programs which have the most significant impact on the long-term financial condition of the Federal government–most notably, Social Security, Medicare, and Medicaid–increased by 8% over 2021 (+$176 billion). Interest on public debt–the cost to the government of borrowing to finance its debt–increased a whopping 29% (+$121 billion). This is the direct result of both massive new Federal borrowing during the COVID-19 pandemic and interest rate increases that began in the spring by the Federal Reserve to help stem inflation. Interest on public debt now takes up 8.5% of all Federal spending/outlays, up from 6.1% last year. Interest rate increases by the Federal Reserve are expected to continue into next year.

The total FY 2022 deficit is substantially higher than both CBO’s May 2022 estimate (+$340 billion) and the Biden Administration’s Office of Management and Budget August 2022 estimate (+$400 billion). At least CBO attributes the difference in its estimate primarily to the estimated cost of the Biden Administration’s student loan debt relief program announced in August ($426 billion).

More on Federal financial results here.

(updated: 10-18-22)

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House Conservatives Proposal to Balance the Budget

The Republican Study Committee released (June 8th) a “Blueprint to Save America,” a budgetary plan to gradually balance the Federal budget with actions starting in the upcoming FY 2023 budget. The discretionary appropriations portion of the Federal budget for FY 2023 is currently under development in the Congress. Mandatory spending, the majority of the Federal budget, requires changes in law and regulation.

The document proposes many measures that the group claims would reduce spending on non-defense activities of the Federal budget, permit new permanent tax cuts, and also allow for increased spending on national defense. Under the plan, the Federal budget would move into a surplus by the year 2029 presumably if all of the measures were enacted. Overall Federal revenue would grow from $4.9 trillion in FY 2023 to $5.8 trillion in 2029, and overall spending would grow from $5.0 trillion to $5.8 trillion over the same period.

Exactly how this can be accomplished is not at all clear. The document does not provide line-by-line estimates for each proposal that adds up to the totals provided. That means there really is no way to critique the proposal from the perspective of realism of the estimates. It is likely that some portion of the revenue estimate is tied to assumptions concerning economic growth derived from a looser regulatory environment, a shifting in the spending approach of the Federal Government (e.g., encouraging work over welfare), greater efficiency and improved management, all which could lead to more revenue that also enables tax cuts.

But there really is no clear way to know in this document. Wishful thinking on the Federal budget is, to some extent, what got the Federal Government into the deficit and debt situation it is in today. The good news is that the document provides thematic detail and specific proposals in support of balancing the budget. The themes and ideas can help provide the public with some understanding of the choices that would be made between the different political parties.

Ultimately, however, until resource estimates can be truly assessed in a transparent way, this document is more useful from an agenda-setting perspective than as a real budgetary plan.

(updated: 6-9-22)

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CBO Budget and Economic Outlook

The Congressional Budget Office (CBO) released (May 25, 2022) its annual budget and economic outlook. The outlook provides CBO’s expectation regarding likely Federal fiscal and economic results. Among the key findings:

• Inflation will come down from current levels, but still end 2022 at a high historical rate of 4%. Also for 2022, economic growth (GDP) will continue at a decent pace of 3.1% and unemployment will continue to stay low at 3.8%.

• The Federal budget deficit will shrink in 2022 to an annual level of $1.0 trillion, but it will increase to an annual level of $1.6 trillion next year and for the foreseeable future.

• The increase of the deficit after this year will be due to rising costs of mandatory programs in the budget (e.g., Social Security and Medicare), as well as higher interest costs from Federal borrowing.

• For the long term, the Federal budget picture gets increasingly bleak. While the ratio of Federal debt to GDP will decrease through next year, it will rise over the next decade reaching 110% by 2032 (a record level) and 185% of GDP in 2052. It will be even higher if costly provisions which are scheduled to end (e.g., expiring tax cuts), are instead renewed.

(updated: 5-26-22)

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