Federal deficit shrank by half in 2022, Biden administration says, but new battles over taxes and spending loom
Biden aides tout plunging deficit as GOP prepares for spending fights.
The Biden administration said Friday that the federal deficit fell in half from the year before, as Washington girds for new battles over taxes and spending with interest rates rising and Republicans expected to take back at least one branch of Congress in the midterm elections.
In a statement, the Treasury Department said the annual deficit had plummeted from $2.8 trillion in 2021 to roughly $1.4 trillion in 2022 — a decline driven primarily by the expiration of trillions in pandemic-era emergency spending. The gap between revenue and spending also shrunk in part due to stronger-than-expected tax receipts, as a booming U.S. economy and large corporate profits helped bring in additional funds to federal coffers.
“Today’s joint budget statement provides further evidence of our historic economic recovery, driven by our vaccination effort and the American Rescue Plan. It also demonstrates President Biden’s commitment to strengthening our nation’s fiscal health,” Treasury Secretary Janet L. Yellen said in a statement. “President Biden’s recently enacted economic plan will build on the economic gains of the past two years.”
The new estimate — widely expected by budget analysts — could help set the stage for fresh fights on Capitol Hill over taxes and revenue. GOP leaders have suggested in recent days that if they have more power in Congress next year, they may be willing to leverage a government shutdown or breach of the federal borrowing limit to demand spending cuts. That could lead to a reprisal of the battles during the Obama administration, in which lawmakers came close to triggering a worldwide economic calamity by failing to pay off America’s loan obligations.
The debates over the deficit will be further intensified by rising interest rates, which dramatically push up the cost of federal borrowing. The Federal Reserve has significantly raised interest rates as part of its battle against inflation and is expected to continue that campaign for the foreseeable future. That could add trillions to the cost of taking on debt, said Marc Goldwein, senior vice president for policy at the Committee for a Responsible Federal Budget, a think tank that pushes for lower deficits.
The Congressional Budget Office, Congress’s nonpartisan budget scorekeeper, has said interest payments on the debt alone could reach $1 trillion per year — roughly double their current amount — by 2030, and that figure does not account for the Fed’s latest rate hikes. Every one point increase in projected interest rates translates into $2.4 trillion in additional debt over a decade, Goldwein said.
“This raises the political cost of making the deficit worse,” Goldwein said. “The borrowing we’re doing now and the borrowing we’re doing in future years will bite into higher interest rate debt.”
The response to those rising costs, however, are likely to splinter lawmakers in Washington.
White House officials have this week repeatedly slammed Republicans for wanting to change Social Security and Medicare. GOP officials have denied they are aiming to cut benefits but said they want to ensure the long-term fiscal solvency of the entitlement programs. Republican lawmakers are also weighing whether to try to cut the clean energy spending in Biden’s signature Inflation Reduction Act intended to fight climate change, according to Stephen Moore, an economic adviser to former president Donald Trump who is in touch with GOP leaders. Democrats would fiercely resist those measures, which many experts believe is necessary in the fight against climate change.
“What I’ve been telling congressional leaders is the most important thing is to cut spending as much as possible,” Moore said. “The new deadly virus is out of control spending. They have to take a hatchet to the budget.”
Biden has touted the Inflation Reduction Act for lowering the deficit by almost $2 trillion over two decades, according to the Committee for a Responsible Federal Budget. But deficit hawks have criticized him for canceling what the Congressional Budget Office has estimated is roughly $400 billion in student debt payments.
Still, some economists have warned about the economic danger of cutting government spending at the same time that the central bank is raising rates — two forces that slow growth.
“We’ve already had sharp cutbacks to the deficit. If you make those even sharper at a time the Fed is already contracting the economy, that’s going to be really damaging,” said Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank. “If you want to throw the economy into a recession, coupling big rate hikes with sharp cutbacks in spending pretty much guarantees it.”
