The U.S. federal budget deficit has narrowed to $1.7 trillion over the past 12 months ending March 2024, showing a $280 billion decrease from the same period a year earlier. This figure is slightly down from the FY2023 deficit, which also stood at approximately $1.7 trillion, according to the Committee for a Responsible Federal Budget.
Why it matters: The deficit reduction reflects significant shifts in federal spending and revenue, influenced by court decisions and economic policies. A notable decrease in spending, primarily due to a Supreme Court ruling that overturned student debt cancellation, has been largely offset by rising costs in social security, healthcare, and net interest payments.
Between the lines: Despite the reduction in spending, revenues have slipped slightly by 0.4 percent to $4.6 trillion, driven by an increase in individual and corporate tax refunds.
What’s next: Looking forward, the deficit is projected to decrease further to $1.5 trillion by the end of this fiscal year, representing 5.3 percent of GDP. However, future projections are less optimistic, with deficits expected to expand to $2.6 trillion, or 6.2 percent of GDP, by 2034.
The impact on housing: The U.S. government faces a challenging fiscal conundrum. On one hand, there’s a strong incentive to lower interest rates to reduce the cost of debt servicing, which would alleviate some of the financial burden on federal budgets. However, because the government continues to issue large volumes of debt to finance its deficits, maintaining higher interest rates becomes necessary to ensure these debt instruments remain attractive to investors. Therefore, it is hard to know which direction rates might move.