THE US government’s budget deficit widened in 2023 as lower income-tax receipts dragged down revenue while rising interest rates added to spending. 

The shortfall for the fiscal year that ended Sep 30 was US$1.7 trillion, equivalent to 6.3 per cent of gross domestic product, according to US Treasury data released Friday (Oct 20). 

That is the third-largest on record and compares with US$1.38 trillion in the prior 12 months, or 5.4 per cent of GDP.

Excluding the accounting effects of President Joe Biden’s plan for student-loan forgiveness, which was struck down by the Supreme Court, the widening of the deficit was much more pronounced: it effectively doubled, to about US$2 trillion.

While the ballooning gap coincides with a surprisingly resilient US economy, it also points to longer-term fiscal risks that in recent months have spurred fresh warnings from economists, politicians and credit-rating agencies.

The burgeoning shortfall could play into Republican lawmakers’ pressure to curtail federal spending. The topline difference between the government’s spending and revenue figures is a perennial hot-button issue in Congress, and polarisation in Washington has made it tougher for politicians to agree on deficit-trimming measures.

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Republicans, who hold a majority in the House, have been in disarray this month since ousting Speaker Kevin McCarthy, failing to agree on a replacement. The turmoil is partly driven by disagreements over spending, and is further delaying efforts to reach any accord with Democrats on funding the government.

Rising debt costs, driven by the Federal Reserve’s most aggressive interest-rate hiking campaign in more than a generation, were a key factor in outlays. 

The Treasury spent US$659 billion on net interest costs for the 12 months through September, some 39 per cent more than the same period the year before. At about 2.5 per cent of GDP, net interest costs were the highest since 1998, a Treasury official said during a briefing.

Fiscal challenges

“The Biden administration continues to focus on navigating our economy’s transition to healthy and sustainable growth,” Treasury Secretary Janet Yellen said in a statement accompanying the data. “As we do, the president and I are also committed to addressing challenges to our long-term fiscal outlook.”

Overall, spending dropped 2.2 per cent from the prior year to US$6.13 trillion, about 22.8 per cent of GDP. 

The weighted average interest rate for total outstanding debt by the end of September was 2.97 per cent, the highest since 2011 and up from 2.07 per cent a year before, Treasury data show. That could rise further, as yields on Treasury securities have jumped in recent weeks to the highest in more than 15 years.

Revenue for the fiscal year slid by 9.3 per cent to US$4.44 trillion, equivalent to about 16.5 per cent of GDP, down from 19.3 per cent. One major reason: A surging stock market prior to 2022 boosted capital gains revenues in the previous year, leading to a relatively worse tax take this year.

In addition, revenue transfers from the Fed – tied to earnings on its securities holdings – plunged 99 per cent to US$1 billion thanks to the rise in interest rates.

For the month of September, the budget deficit was US$171 billion, compared with US$430 billion a year earlier. BLOOMBERG