Back in the 1980s, President Reagan took enormous political heat (Sam Donaldson comes to mind) for being fiscally irresponsible. His offense? Presiding over a budget deficit that peaked at 5.9% of GDP in Fiscal Year 1983.
But at least Reagan had an excuse. Actually, multiple excuses. The unemployment rate averaged 10.1% in FY 1983, which pushed up spending, while reducing revenue. The Reagan tax cuts were phased-in, so many people pushed off income (and taxes) into future years. Finally, the US decided to bury the USSR under massive defense spending.
The reason we bring this up is that we estimate the budget deficit for this year (FY 2023, ending September 30) will be $1.74 trillion, or 6.5% of GDP. That’s larger relative to GDP than the largest budget deficit ever under Reagan. Worse, this is happening when the unemployment rate will average about 3.6%, the lowest average for any fiscal year in more than fifty years.
But the current budget situation is even worse than these numbers suggest. Last year (FY 2022), the budget deficit came in at $1.375 trillion. But this deficit was artificially boosted by government accounting. President Biden’s plan to forgive student loans lifted the deficit by $379 billion, the present value of the extra future losses estimated on the forgiven debt. The government’s budget accounting rules included it as extra spending last year, even though it didn’t affect the government’s cash flow.
In other words, without the Biden loan forgiveness plan, the budget deficit would have been about $996 billion last year, or 4.0% of GDP. Not good, but not horrible, either.
But this year the Supreme Court struck down most of the loan forgiveness plan. As a result, extra future loan repayments are now being added back into the budget. The government counts this as a “negative outlay,” and this change results in a one-time artificial reduction in the deficit of $330 billion. Without the Supreme Court ruling we estimate the budget gap this year would be about $2.07 trillion, or about 7.8% of GDP.