By Mike Maharrey, Monetary Metals Exchange
The federal government's budget deficit was “only” $21.93 billion in January.
This is a significant improvement from the $129 billion deficit recorded in December.
But don't throw away the confetti.
The smaller deficit was mainly due to increased government revenue thanks to a large drop in tax refunds. But the Biden administration continues to spend like a drunken sailor. (No disrespect to drunk sailors).
Meanwhile, interest payments on the ballooning national debt continue to expand at breakneck speed.
Through the first four months of fiscal year 2024, the federal government ran a deficit of $531.86 trillion, according to the latest Treasury Monthly Report. That's a 16 percent increase from the same period in fiscal 2023.
These huge monthly budget deficits are raising the national debt at a dizzying rate. On December 29, the national debt surpassed $34 trillion for the first time. When Congress effectively removed the debt ceiling on June 5, the national debt stood at “only” $31.46 trillion. As of February 9, the national debt stood at $34.2 trillion.
According to the CBO, public debt is projected to rise from $26.2 trillion to $48.3 trillion by the end of 2034. That would represent 116 percent of GDP and would be the highest level on record.
The US government has a spending problem
The federal government is a bit like a drunk guy who stays up late shopping on Amazon (NASDAQ:).
The Treasury reported revenue of $477.32 billion last month, a record for January. The collection of payroll withholdings and income taxes helped boost government revenue. The IRS has also cleared a backlog of late income tax returns during the pandemic year.
But even with this revenue windfall, the U.S. government still ran a deficit. That's because he is addicted to spending money.
In January, the US Biden administration wasted $499.25 billion, also a January record.
Spending increased 2.7 percent from January 2023, even without any one-time disbursements. Last year, January spending was boosted by a $36 billion bailout of a Teamsters union pension fund. Taking that one-time expense into account, federal spending increased nearly 11 percent year over year.
This underscores the fact that the fundamental issue is not that the US government does not have enough money. The fundamental problem is that the US government spends too much money. Despite the Biden administration's supposed spending cuts and promises that it would save “hundreds of billions” the debt ceiling deal (also known as the [misnamed] Fiscal Responsibility Law) did not address that problem. No matter what you hear about spending cuts, the federal government always finds new reasons to spend more money.
The interest rate problem
These large budget deficits come at a time of sharp increases in interest rates. This is a big problem for a government that relies primarily on borrowing to pay its bills, and it's probably one of the reasons the Federal Reserve is talking about rate cuts. The US government, which borrows and spends, cannot function in a high interest rate environment.
The US government spent $69.2 billion on interest expenses alone in January. This was more than the amount spent on national defense ($60 billion) and more than health care ($68 billion).
Interest on the federal debt rose $96 billion during the first four months of the fiscal year than in the same period last year. The government has spent $357 billion in interest payments in fiscal year 2023. The only category with higher spending was Social Security.
Net interest expenses, excluding intragovernmental transfers to trust funds, were $283 billion for the first four months of the fiscal year, almost as much as the government spent on national defense ($298 billion).
And interest expenses will continue to rise.
Much of the debt currently on the books was financed at very low rates before the Federal Reserve began its hiking cycle. Every month, some of those super-low-yielding papers mature and have to be replaced with bonds that yield much higher rates.
The weighted average interest rate on the government's outstanding Treasury securities rose to 3.21 percent at the end of January. That compares with a weighted average rate of 2.43 percent in January 2022.
Rising interest rates pushed interest payments to more than 35 percent as a percentage of total tax revenue in fiscal year 2023. In other words, the government is already paying more than a third of the taxes it collects on interest expenses.
And the situation will only get worse unless the Federal Reserve quickly reduces interest rates.
Interest expenses will continue to rise at a rapid pace as more and more Treasury bonds mature and are replaced by higher-yielding bonds.
The only way out of this fiscal death spiral is significant spending cuts and/or significant tax increases.
I couldn't hold my breath.
And I would hold on to my confetti.