The federal deficit keeps ballooning and we should seriously be concerned about it. It, indeed, is much bigger than it looks and this is why we shall keep a close eye on it. The official deficit for fiscal year 2023 is projected to be $1.7 trillion. But that does not include the full cost of the Biden administration’s student loan forgiveness plan, which could add another $1 trillion to the deficit over the next decade.
Even without student loan forgiveness, the deficit is on track to grow in the coming years, and this is due to a number of reasons including an aging population, which is driving up spending on Social Security and Medicare; the rising interest rates which will make it more expensive to service the national debt; and the continued government borrowing.
And yet, the federal government keeps increasing the budget deficit by trillions. By why? Who is to blame for the endless rise of the federal deficit? The first to blame is us; the voters; us who believe that the government should do more for us. But asking the government to do more for us comes at a cost, and it is a cost that reduces our wealth. By asking politicians to do more for us by creating more government programs and agencies, we unconsciously reduce our wealth because the government cannot create any service on its own. It needs to take the funds from us to create these services for us by either borrowing heavily from the central bank or raising taxes.
The capacity of the government to indefinitely borrow from the central bank is why the federal deficit is endlessly rising. And this endless rise has serious consequences, not just on the economy, but on us the taxpayers.
The federal deficit incentivizes higher inflation. When the government borrows money to finance its deficit, it increases the demand for goods and services. This can lead to higher prices for consumers and businesses. In addition to incentivizing higher inflation, it also incentivizes higher interest rates. Indeed, when the government borrows money, it competes with businesses and individuals for loans. This can drive up interest rates, making it more expensive for businesses to invest and for individuals to buy homes and cars. And lastly, the federal deficit creates generational imbalances. It is essential to reiterate the fact that when the government borrows money, it is essentially shifting the burden of paying for government spending to future generations.
Hence, the growth of the federal deficit is not something to celebrate, it is not something to be proud of, and it is not something to encourage. Its growth increases the national debt because if the government spends more than it generates in revenue, the deficit incurred must be covered. And the only way for government to cover the deficit incurred is by borrowing more money from the central bank and other lenders to pay for the previous financial obligations, which are themselves tied to borrowed money.
Federal spending can be curbed. But that means that the federal government will be compelled to cut spending by cutting wasteful programs, which will reduce the size of government. Reducing the size of government helps avoid increasing taxes.