Credit Sesame discusses U.S. government budgeting considerations for the 2024 federal budget.
For the second time in 2023, U.S. Congress is facing a financial impasse. Earlier in the year, this involved a standoff over the debt ceiling. Now, it is about finalizing and approving the 2024 federal budget so as to allow the government to fund its programs. Stalemates such as this usually occur when one or both houses of Congress are controlled by a political party other than the party that holds the White House.
The stated objective for the 2024 fiscal year is to get some take-back of spending plans that had previously been passed through the standard legislative process. It’s a way of using negotiating leverage to achieve political goals one or the other party was unable to obtain through the lawmaking rules outlined by the Constitution.
American consumers may not care much about those political goals. However, the social and financial chaos that could arise as a result could profoundly impact lives across the nation.
How does the 2024 federal budget standoff differ from the debt-ceiling standoff?
The standoff earlier this year was over the debt ceiling. The debt ceiling is a legal limit on how much the U.S. Treasury is allowed to borrow. The Treasury has to borrow money in order for the United States to pay its bills because the federal government routinely spends more than it takes in from taxes and other revenue.
The current standoff is over the federal budget for the fiscal year that began October 1. Without passing a budget, there will be no funding approved for the massive amount of programs and activities the government supports.
Deficits and the U.S national debt
When the federal government’s annual budget is balanced, it means that government revenue, usually through taxes and other sources, is equal to or exceeds government spending. Based on figures from the Office of Management and Budget, the last President to balance a budget was Bill Clinton. Prior to that, it was Dwight Eisenhower. It is fair to say that running a deficit has become standard operating procedure for the federal government. The U.S. federal budget almost always requires borrowing money to meet expenses. When the government spends more than its revenue, it’s called a budget deficit.
The lowest the deficit has been in the past 20 years was just under $442 billion during the Obama Administration. For the most 2023 fiscal year the deficit exceeded $1.5 trillion.
Annual federal budget deficits are different from the national debt. The deficit is the amount of debt run up in a single year. The national debt is the total, accumulated amount of debt the government owes as a result of these deficits.
Since annual surpluses are rare, the total amount of debt inevitably rises over time. As of the end of the 2022 fiscal year, it had reached $30.93 trillion, according to the Treasury Department. Continued borrowing required an increase in the debt ceiling earlier this year.
According to NPR, up to that point, the debt ceiling had been raised 78 times in the past 63 years. This happened under both Republican and Democratic administrations.
Where will all the money go in the 2024 federal budget?
Does the government really need all this money? A large sector of the U.S. population believes the government spends too much and that expenditure should be cut. The hard part is getting politicians to agree on what should be cut.
For example, the federal government’s three biggest expenses are Social Security, Medicare and defense. Politically, it would be very hard to reduce spending on any one of those three, let alone all of them. So, spending bills are routinely passed, and the government borrows to pay for them.
Adding to the problem is the recent rise in interest rates. Just like many consumers, the federal government has a record amount of debt but now higher interest rates are making that debt more expensive to maintain.
Between a larger amount of debt and rising interest rates, interest payments now represent 12% of federal spending. This makes it challenging to close the annual budget deficit, let alone pay down debt accumulated so far.
What if the U.S. government stops paying its debts?
Defunding the government or reneging on the country’s existing debts may appeal to some people, but it would likely have catastrophic effects.
Federal government employees, from the military to postal workers to federal law enforcement agents and recipients of Social Security and other government benefits depend on federal funds. All could potentially see payments delayed, reduced or missed altogether if the 2024 federal budget is not funded.
In addition, there are lenders the United States owes money from debt created to fund previous budgets. The U.S. Treasury borrows money by issuing bonds. U.S. Treasury bonds are widely held by investors around the world. This includes significant holdings by retirement plans that are the nest eggs of nearly 140 million private-sector workers and retirees, according to the Employee Benefit Research Institute.
Holders of these bonds are owed future principal and interest payments by the U.S. government. If it is believed that the United States will fail to fully meet its obligations to those bondholders, the value of those securities would likely plunge.
Possible financial fallout
Beyond the direct financial impact of a U.S. default, there would be considerable financial fallout afterward including perhaps,
- Higher interest rates to reflect the increased risk of lending
- Market turmoil with stock and bond prices plummeting
- Reduce government services possibly in healthcare, infrastructure, education and defense
- Economic slowdown leading to job losses and lower economic growth
- Weakened domestic and international confidence in the U.S. economy affecting the value of the U.S. dollar
Even if the government stops short of a default, the repeated threats to force a default could have an adverse effect. Think of it this way. If someone lends you money, and you loudly and repeatedly proclaim that you might not pay them back before you eventually do, how eager do you think they’d be to lend you money next time?
The United States government relies on a massive amount of borrowing. It’s generally able to pay low-interest rates on this borrowing because it is considered an extremely reliable borrower. Toying with that reputation is a dangerous and potentially very expensive game.
The slow erosion of financial credibility is also a risk
Threatening to default on borrowing may be an especially rash way of endangering the financial credibility of the U.S. government, but ever-expanding debt could also erode it over time, with far-reaching implications for the nation’s economic stability and global standing.
Consumers are reminded frequently that over-extending themselves financially or failing to make repayments can damage their credit history and have long-ranging consequences. The same is true of the government, only the stakes are even higher.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.