US budget deficit keeps rising in '23. It ain't just spending, it's the Fed and more refunds

With President Biden releasing his budget last week, the CBO budget review for February gives us a good update on where our budget deficit is. And it seems like the deficit is quite a bit higher than last year, which would put in another layer in the upcoming high-stakes budget talks.

To start with, tax revenues continue to lag, which is odd given the strong wage and job growth that continues in the country.

That's a relative tame increase in withheld payments, but it's at least an increase and somewhat understandable. What's causing that decline outside of withheld payments? One is due to higher refunds than in the 2021 tax year, and the other is due to 2022's and 2023's higher interest rates.

• Individual income tax refunds more than doubled, rising by $68 billion, thereby reducing net receipts. The precise timing of refund payments varies from year to year, but most will be paid in the period from February through April. The Internal Revenue Service reports that the number of refunds issued through the fourth week of February was 18 percent greater than in the same period in 2022. Average amounts refunded so far in 2023 are about 11 percent smaller, in part because the pandemic-related recovery rebates (also known as economic impact payments) and the expanded child tax credit have expired. …

• Remittances from the Federal Reserve decreased from $48 billion to less than $1 billion. Higher short-term interest rates raised the central bank’s interest expenses above its income, eliminating the profits of most Federal Reserve banks.

That's some of the reason for the jump in the deficit. But increased spending also is playing a significant role, led by the “big 4” – Social Security, Medicare, Medicaid, and Interest on the debt, and a one-off item.

A lot of this increase in Social Security and Medicare are related to the big inflation-related jumps in benefits to help seniors for 2023, and Medicaid is still paying expanded federal costs for continuous enrollment (which is going to be rewound in the coming months), and you can thank Jerome Powell and the Fed's rate hikes for the increase in interest costs on the debt.

But what’s that “Spectrum Auctions” item? The CBO explains.

The largest increase in outlays was related to receipts from the auction of licenses to use the electromagnetic spectrum. Proceeds from such auctions are recorded in the budget as offsetting receipts—that is, as reductions in outlays. In the first five months of fiscal year 2022, receipts totaled $81 billion—all recorded in January. No such receipts were collected during the first five months of 2023, resulting in a net increase in outlays.

What's concerning is that this big jump in overall spending is happening as other areas of “spending” are being cut due to the end of COVID-era stimulus.

Outlays for certain refundable tax credits totaled $84 billion—a decrease of $69 billion, or 45 percent. That reduction occurred because the expanded child tax credit has expired. (In tax year 2021, eligibility for and the size of the child tax credit were expanded, and advance payments were made between July and December 2021.)

Outlays from the Public Health and Social Services Emergency Fund decreased by $34 billion (or 66 percent), as expenditures decelerated for several pandemic-related activities, including reimbursements to hospitals and other health care providers, spending on coronavirus testing and contact tracing, and development and purchase of vaccines and therapies.

Spending by the Small Business Administration decreased by $15 billion, or 94 percent. In the first five months of fiscal year 2022, that agency recorded nearly $16 billion in outlays, mostly for disaster loans and for grants to operators of shuttered entertainment venues. Those outlays declined toward the end of fiscal year 2022, and there has been little such spending in the current fiscal year.

As mentioned earlier, there is some more fiscal restraint coming in Spring 2023, with expenses in SNAP and Medicaid likely to level off and decline vs last year as those expanded benefits and automatic enrollments in those respective programs go away in March and April.

While that's good fiscal news, the deficit is still certainly on the rise, and the higher interest rates complicate this due to adding expense onto the debt. Which makes for a chicken-egg question about whether the higher deficits lead to higher inflation, and so that’s why the Fed should keep rates high to slow down that type of inflation (I generally disagree witht his idea, other than deficits leading to some higher demand). Or does it mean the Fed should back off on these higher interest rates because it’s causing higher expenses and making the deficit “problem” worse? (that's where I'm at)

The higher refunds is also something to look at, both now and in the future, because extra added refunds might mean more “extraordinary measures” have to happen by the Treasury to keep from going over the debt limit, since more cash is going out the door. Or we hit the debt limit sooner, and/or refunds get slowed down to stay at/under that limit.

It also definitely means this isn't the time to bail out one Silicon Valley Bank and the boom-bust tech and start-up schemes that those funds were pulled into. Not only is it rewarding sketchy business procedures, we also literally might not have much money available to do it, at least in the coming months.