A Closer Look at the Budget Deficit

While the primary focus for the financial markets has been on the continued resilient U.S. economy and what the current Fed rate cut cycle will ultimately look like, there has been another topic that has been making the rounds in the bond arena: the budget deficit. There’s no doubt that the November 2024 election has resulted in renewed attention to the U.S. government’s finances as the candidates flesh out their fiscal plans for the future. Unfortunately, both Republicans and Democrats have shown little, if any, fiscal discipline, so there do not appear to be any policies looming on the horizon that could result in reining in the deficit any time in the foreseeable future.

Against this backdrop, let’s take a look at what the starting point will be going forward. For a little U.S. Budget 101, the federal government’s fiscal year is not the same as a calendar year. The U.S. fiscal year begins in October and ends in September. As a result, the budget figures released a couple of weeks ago represent the final tally for FY 2024.

According to the Treasury Department, the U.S. ran a deficit of -$1.8 trillion for FY 2024. This represented a +8.1% increase from the prior fiscal year’s shortfall of -$1.7 trillion. While not as high as the COVID-19-related record red ink of -$3.1 trillion in FY 2020, the deficit has still risen for three years in a row and is visibly above the prior high watermark of -$1.4 trillion that was recorded in FY 2009 as a result of the financial crisis and great recession.

In terms of federal government receipts and outlays, both categories registered increases for the year. On the revenue side of the ledger, the FY vs. FY gain was placed at almost $480 billion, or +10.8%. This increase reflected higher receipts coming primarily from individual income and corporate taxes. Meanwhile, spending rose by $617 billion, or +10.1%, from the previous fiscal year. Some of the notable positive contributors to the overall increase in outlays were the Departments of Education and Defense, but a major culprit was interest on the public debt.

Needless to say, the continued building up of government red ink is resulting in a burgeoning U.S. Treasury debt. Through September of this year, the total marketable public debt outstanding has swelled to almost $28 trillion. This figure represents a roughly $2 trillion increase from September 2023. You want to go back a little further? Total marketable public debt outstanding was “only” $16 trillion pre-COVID-19 in 2019.

As mentioned previously, the reason why this topic has resurfaced is all of the attention surrounding the election and what the results could actually mean on the fiscal policy front. Whether it’s a red or blue sweep, investors will be greeted with the prospects of higher deficits and Treasury supply in the years ahead. A stalemate federal government just keeps the shortfall on its current path, at best, with nearly -$2 trillion in red ink being the baseline.

Let’s go back to the beginning of this piece. The premise was that higher deficits had now come onto the bond market’s radar. This is nothing new. However, in the past, when deficits and the attendant required increase in Treasury supply have been contributing factors to rate trends, this factor usually served as more of a secondary or tertiary force. The macro and Fed policy backdrops are the primary drivers for rate trends, with deficits and supply essentially adding to or deleting from an existing trend. We would expect this outcome to continue regardless of the election outcome.