In a concerning development, the United States has recorded a budget deficit of $1.695 trillion in fiscal year 2023, marking a 23% increase from the previous year. This fiscal deficit surge is primarily attributed to a decrease in revenues and escalated outlays for Social Security, Medicare, and unprecedented interest costs on the national debt.

This sizable budget deficit surpasses all pre-COVID deficits, including those incurred during the Republican tax cuts initiated under Donald Trump and the financial crisis years. It is expected to intensify President Biden’s fiscal confrontations with Republicans in the House of Representatives. Their insistence on spending cuts had previously brought the U.S. perilously close to a default in early June concerning the debt ceiling.

The need to circumvent a government shutdown, driven by demands for deeper spending cuts from Republican hardliners, resulted in the removal of U.S. House of Representatives Speaker Kevin McCarthy. The Republican party continues to grapple with internal divisions, further complicating negotiations as a new fiscal deadline approaches in mid-November.

The US Budget Gap Reaches $1.7 Trillion, Its Largest Since the COVID Era

For September, the last month of the fiscal year, the deficit declined to $171 billion from $430 billion in September 2022.

The drop in revenues stands out as a significant factor contributing to the 2023 deficit, emphasizing the significance of President Biden’s enacted and proposed policies aimed at tax system reform. Treasury Secretary Janet Yellen and Office of Management and Budget Director Shalanda Young underscored this in a joint statement.

The fiscal deficit for 2023 would have been $321 billion more substantial if not for the Supreme Court’s ruling against Biden’s student loan forgiveness program as unconstitutional. This decision led to the reversal of a preemptive charge against the fiscal 2022 budget results, which otherwise would have increased that year’s deficit. In fiscal year 2022, the deficit stood at $1.375 trillion.

Taking into account these one-off adjustments, last year’s deficit would have been closer to $1 trillion, and this year’s deficit would approach $2 trillion, according to a Treasury official.

The 2023 deficit marks a notable departure from two years of declining deficits under the Biden administration as COVID-19 spending gradually waned. The U.S. experienced its highest deficit in fiscal 2020, reaching $3.13 trillion due to the most severe economic downturn since the 1930s, leading to decreased tax revenues and increased spending on unemployment benefits, direct consumer payments, and business aid.

The Congressional Budget Office has issued a warning that if current tax and spending legislation remains unchanged, U.S. deficits will rise, approaching levels seen during the COVID era by the end of the decade. Projections estimate deficits could reach approximately $2.13 trillion in 2030, driven by mounting costs associated with interest, health, and pensions.

The US Budget Gap Reaches $1.7 Trillion, Its Largest Since the COVID Era

In the fiscal year 2023, total revenues decreased by $457 billion, a 9% drop from fiscal 2022, totaling $4.439 trillion. This decrease was primarily due to reduced non-withheld individual income tax payments, influenced by underperformance in stocks and other financial assets as interest rates rose. Other revenue declines included a $106 billion reduction in Federal Reserve earnings due to increased interest payments on bank reserves.

Fiscal 2023 outlays decreased by $137 billion, a 2% reduction from the previous year, amounting to $6.134 trillion. These outlays would have seen a more modest decrease were it not for substantial increases in spending on retirement and healthcare benefits for the elderly and interest service costs.

Social Security spending notably increased by 10% to $1.416 trillion, mainly due to cost of living adjustments to combat inflation. Concurrently, spending on the Medicare senior healthcare program rose by 4% to $1.022 trillion.

Interest costs on the federal debt, which now stands at over $33 trillion, experienced a sharp rise, increasing by 23% to reach $879 billion, a record high. Net interest payments, excluding intragovernmental transfers to trust funds, also rose by 39% to $659 billion, setting another record. These gross interest payments accounted for 3.28% as a share of the gross domestic product, the highest since 2001, while the net share at 2.45% was the highest since 1998, according to a Treasury official.