Amid the mounting U.S. debt, the cost of servicing debt has seen a 25 percent surge in the the ongoing fiscal year (October to June), reaching a staggering $652 billion. According to the US Department of Treasury, the weighted average interest for total outstanding debt is at 2.76 per cent, the highest level since February 2012. Consequently, this has contributed to the significant increase in the federal budget deficit.
The Treasury Department said on Thursday that the federal government deficit has exceeded $1.39 trillion over the nine-month period ending in June, marking a whopping 170 percent rise compared to the corresponding period in the previous year. Moreover, the federal government’s deficit has nearly tripled since October 2022, further exacerbating the colossal debt burden of $32 trillion.
The increasing deficit is likely to fuel the efforts of Republican lawmakers to reduce federal spending. Although the Grand Old Party, which holds the control of the House, recently reached an agreement with the Biden administration to temporarily suspend the debt ceiling, a fresh clash over spending for the upcoming fiscal year 2024, commencing on October 1, could be on the horizon.
Factors contributing to the expansion of the budget deficit
Rising interest rates have played a significant role, as the US Federal Reserve has increased its benchmark rate by 5 percentage points since initiating rate hikes in March of the previous year. Currently, five-year Treasury rates stand at approximately 3.96 per cent, a notable rise from 1.35 per cent at the start of the year. Consequently, as lower-yielding assets mature, the Treasury’s interest rates on existing debt will steadily increase.
A drop in tax revenue has also been a contributing factor, primarily due to a decline in capital gains tax collection. The decline in government revenue can be attributed to the decrease in stock, bond, and other asset prices observed in the previous year. Tax revenue between October and June was 11 percent lower compared to the same period a year ago.
There has been a surge in government spending, with a significant jump of 10 percent. This surge can be attributed, in part, to the impact of inflation. The rise in inflation has necessitated higher expenditures across multiple categories of government spending.
(With inputs from agencies)
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