Americans should care about the financial results of the Federal Government as these impact (now or in the future) their safety, security, and quality of life through Federal activities and programs, as well as solutions to policy concerns that matter to them.
So let's take a quick look at the results for Fiscal Year (FY) 2022.
Summary Results
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, nearly $1.5 trillion below the level 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 refundable 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–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.
Student Loan Relief Impact
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).
Federal accounting rules require that the full, present value cost of such relief be recorded in its books up front (note: the full cost of the student loan relief may actually be more as at least one key element – income-driven repayment – is still under development). The student loan relief decision was issued by the Biden Administration in August, and therefore the cost shows up in FY 2022 financial results.
As the costs of the student loan program may not actually be realized for some time, an argument could be made that the accounting distorts the last year's financial improvement outcomes. An alternative view is that the financial condition of the Federal Government should not be measured by any single snapshot year; rather, the better measure is the longer-term financial trajectory of today’s financial decisions, which also have the potential of guiding future action.
Overall Assessment
Despite the spike increase in the actual Federal deficit at the end of FY 2022 given the decision to forgive a large amount of student loans, financial results were good. As a percentage of gross domestic product (GDP)–a key measure of economic activity–the budget deficit declined from about 12% of GDP in 2021 to 4%-5% this year, depending on final FY 2022 GDP estimates that have been declining. Historically, CBO says that deficits have totaled about 3.5% of GDP.
That being the case, the longer-term outlook of the Federal budget has not changed from a negative outlook affected by years of financial decisions of Republican and Democrat Administrations, and both liberal and conservative decisions makers in Congress. Under current policies, CBO estimates that the budget deficit will increase back up to more than 6% of GDP by FY 2032. And, the Federal Government is already $31 trillion in debt, or five times last year’s budget outlays.
For the near-term, Congress will likely need to increase its statutory debt limit in the February-April timeframe so that it can continue to borrow and ensure the financial stability of critical programs. For the long-term, Congress and current/future Administrations will need to take actions to both further increase revenue and reign-in Federal spending.
Why? Because borrowing to finance shortfalls only works well if lenders are willing to lend, and at reasonable prices. Further increasing our dependence on borrowing could put Federal budget activities–such as vital national defense programs, Social Security and Medicare–at undue risk to market and/or world political dynamics that undermine our ability to secure debt financing at a reasonable price. This is not about having no deficit or debt at all; rather, keeping these at levels that can be managed with a reasonable level of risk.
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