Policy Backgrounders

FY2023 Spending on Debt Interest Explodes to Exceed Defense

November 01, 2023

• The US fiscal outlook continues to deteriorate, with the deficit for FY2023 topping estimates at $1.7 trillion, according to the Treasury Department’s final FY2023 budget figures. The $1.7 trillion annual deficit is $320 billion more than in FY2022 and above earlier official estimates. With these new figures, total US debt stands at $33.6 trillion. The cost of servicing US debt rose to record heights—$879 billion, a $162 billion (23 percent) increase from FY2022 because of higher interest rates on the rising national debt. The cost of servicing the US debt is now larger than annual spending on appropriations for national defense.
• The deficit grew by $320 billion (or 23 percent) from FY2022 to equal 6.3 percent of GDP. Removing the effects of the proposed student debt cancellations that the Supreme Court blocked in Biden v. Nebraska, the deficit totaled $2.0 trillion—double the $1.0 trillion deficit in FY2022 (excluding the effects of student loan cancellations) and $493 billion higher than the $1.5 trillion deficit the Congressional Budget Office (CBO) projected in June.
• The widening budget gap reflects falling revenues (down 9 percent), primarily from lower individual income tax receipts, as capital gains realizations fell, while declines in Federal Reserve interest on deposits were offset by increases in social insurance and retirement receipts.  Federal spending decreased slightly (down 2 percent) because of the end of pandemic-era programs and adjustments removing the expected impact of the student loan cancellation program that the Supreme Court blocked. Removing the effects of student loan adjustments, overall FY2023 spending rose 9.8 percent, with outlay increases driven by the rising costs of Social Security and health programs.
• To fund surging deficits, the US Treasury must boost debt issuance at the same time as interest rates on federal debt reach their highest levels since the global financial crisis and as the market composition for Treasuries is changing. This threatens to crowd out private investment by diverting investment dollars away from the private sector and toward US Treasury bonds, which are used to finance existing obligations of the government, not new private-sector initiatives.