The US will run a federal budget deficit of $1.1 Trillion dollars in 2023, product of $4.7T in tax revenues minus $5.8T in expenses. At the same time, experts estimate that the federally mandated debt ceiling of $31.4T (the maximum level of national debt allowed by Congress) will most likely be breached in Q1 or Q2 of 2023.

Before the government can sell Treasury bonds to cover the deficit, Congress would need to raise the debt ceiling. Democrats and Republicans will argue about it, but in the end both sides will make concessions and the debt ceiling will be raised, again.

Now let’s talk about the debt.

Our $31.4T national debt is the result of years of accumulating budget deficits. That debt has been financed by selling Treasury bonds. Currently, interest payments on the debt are roughly $0.5T per year, one of the largest expenses in the federal budget, behind Medicare/Medicare ($1.5T), Social Security ($1.2T), and the Military ($0.7M).

Furthermore, the average maturity of our national debt is about 6.1 years, which means that approximately 1/6 of our $31.4T debt, or $5.2T, will come due every year. The money to pay back maturing bonds is NOT part of the federal budget, so the US government will need to sell $5.2T of new bonds to pay back bondholders. Those bonds will carry a much higher interest rate (for example, the yield of the benchmark 10-Year T-note is now fluctuating between 3.5% and 4%, the highest level in 10 years).

Now, what would happen if nobody wants to buy our bonds?

Well, the $4.7T we collect in tax revenue wouldn’t be enough to pay for the $5.7T needed to service our debt, and the US would be in default. Also, there wouldn’t be a single penny left to run the federal government: no Medicare, no Social Security, no Military, nothing. The country would slip into a depression and possibly a revolution.

But fortunately, people and institutions still want to buy our bonds. After all, the US has never defaulted, and Treasury bonds are considered the safest investment. What could happen, though, is that bond buyers could demand a higher interest rate if we don’t put our fiscal house in order.

Higher interest means higher deficits, and higher deficits require more debt, feeding a vicious cycle that has to break at some point. The sensible thing to do would be to start reducing our federal expenditures until we achieve a balanced budget.

Unfortunately, neither the government nor Congress are showing any inclination towards fiscal restrain. By kicking the can, our elected officials are not only not solving the problem: they are making it worse and passing the buck to future generations.

Resources

U.S. Federal Government Tax Revenue 2023

U.S. Debt Dashboard in Real Time

Breaking Down the Proposals in the President’s FY 2023 Budget