The $1.4 trillion reduction in the deficit was the largest-ever single-year improvement in the US fiscal position.
The US government on Friday reported that its fiscal 2022 budget deficit plunged by half from a year earlier to $1.375 trillion, due to fading COVID-19 relief spending and record revenues fueled by a hot economy, but student loan forgiveness costs limited the reduction.
The US Treasury said the $1.4 trillion reduction in the deficit was still the largest-ever single-year improvement in the US fiscal position as receipts hit a record $4.896 trillion, up $850bn, or 21 percent from fiscal 2021.
President Joe Biden touted the deficit reductions in remarks at the White House, chiding Republicans for talking but doing nothing about shrinking the deficit. He also said his administration lowered the deficit while boosting spending on infrastructure and expanding benefits for middle- and low-income Americans.
“You know, we’ve gone from an historically strong economic recovery to a steady and stable growth, while reducing the deficit,” Biden said.
Outlays for fiscal 2022, which ended September 30, fell by a record $550bn, or 8 percent from last year to $6.272 trillion. But the outlays for September, the fiscal year’s final month, included the recognition of $430bn in costs from the Biden administration’s plan to forgive student debt of up to $20,000 for former college students now earning less than $125,000 a year and less than $250,000 for married couples.
Much of the cost of debt forgiveness was booked in September, even though the repayment of the loans would have likely occurred over several years.
The move brought the September budget deficit to $430bn, more than six times the prior-year September deficit of $65bn. In most years, September is a surplus month due to the payment of quarterly corporate and individual taxes.
The Congressional Budget Office estimated that the plan would cost about $400bn. It also includes the extension of a COVID moratorium on all student loan payments until the end of 2022, which added about $21bn in budgetary costs.
Non-governmental budget analysts have estimated that the plan would wipe out a much-touted deficit reduction from Democrats’ recently enacted climate, healthcare and Internal Revenue Service funding bill.
US Secretary of the Treasury Janet Yellen told reporters that the Biden administration was maintaining a “credible fiscal policy” despite the unfunded student debt relief that was a Biden campaign promise.
“I do see our debt as being on a responsible path,” she said, adding that net interest on the debt as a share of gross domestic product (GDP) was forecast to only rise to about 1 percent, a “low” historical level.
Federal finances improved during the past 12 months as the unemployment rate dropped to 3.5 percent from 4.7 percent in September 2021. The job gains enabled tax revenues to jump 21 percent from a year ago, while overall spending fell 8 percent as the government’s coronavirus-related aid has faded.
However, revenue gains during September started to slow from prior months, growing only 6 percent from a year earlier to $488bn. And the CBO is projecting that with the economy slowing further amid higher Federal Reserve interest rates, revenues will slow further in future years. Rising interest costs also will start to consume a bigger share of the federal budget, the non-partisan fiscal referee agency predicts.
In May, the Congressional Budget Office expected the federal deficit to fall in 2023 and then start to rise in the years ahead to $2.25 trillion a decade from now.