US budget deficit more than halves to $1.375tn despite $430bn in student loan costs

Fading Covid-19 relief spending and record revenues fuelled by a hot economy contributed to the decrease

US President Joe Biden said the deficit would shrink by another $250 billion over the next decade, given Medicare's ability to negotiate lower drug prices. AP Photo

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 revenue fuelled by a hot economy, but student loan forgiveness costs limited the reduction.

The US Treasury said the $1.4tn reduction in the deficit was still the largest-ever single-year improvement in the US fiscal position as receipts hit a record $4.89tn, up $850 billion, or 21 per cent from fiscal 2021.

President Joe Biden touted the deficit reductions in remarks at the White House and at Delaware State University, and said the deficit would shrink by another $250bn over the next decade, given Medicare's ability to negotiate lower drug prices.

Mr Biden chided Republicans for voting against the deficit reduction. While his administration lowered the deficit, it has boosted spending on infrastructure and expanded 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," he said.

Outlays for fiscal 2022, which ended September 30, fell by a record $550bn, or 8 per cent from last year to $6.272tn.

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 under $125,000 a year and under $250,000 for married couples.

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-19 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 Treasury Secretary 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 GDP was forecast to only rise to about 1 per cent, a "low" historical level.

Revenue gains during September started to slow from prior months, growing only 6 per cent from a year earlier to $488bn.

And the CBO is projecting that with the economy slowing further amid higher Federal Reserve interest rates, revenue 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.

Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, a fiscal watchdog group, said the effect of recognising the student loan forgiveness costs in fiscal 2022 will be to show a steadier decline in deficits from the pandemic — rather than a sharper narrowing to around $1tn, followed by an increase to around $1.4tn for fiscal 2023.

The CBO had forecast a fiscal 2023 deficit of about $984bn, with deficits rising steadily thereafter to nearly $2tn by 2030.

"I think it's more appropriate to recognise the costs as the debt is being cancelled, and the bulk of that will happen in fiscal 2023. But the government has latitude here," Mr Goldwein said in a phone interview before the release.