The U.S. federal budget deficit in December widened to $129 billion, a significant increase from the $85 billion deficit recorded in the same month the previous year, according to the Treasury Department.

During the first three months of the fiscal year, the deficit also expanded, reaching $510 billion compared to $421 billion during the same period in the previous year.

Key Details

The Treasury Department reported that in December, spending experienced a notable acceleration, while receipts declined.

Receipts decreased by $26 billion compared to the previous year, totaling $429 billion, whereas outlays increased by $19 billion to reach $559 billion.

An increase of $78 billion in interest on the federal debt was observed over the first three months of the fiscal year. This brought the total to $288 billion, primarily due to the Federal Reserve's rapid interest rate hikes, resulting in higher interest payments.

Additionally, spending was boosted by outlays of the Federal Deposit Insurance Corp. These funds were necessary to address bank failures that occurred last year. The FDIC has hopes of recovering a significant portion of this amount through higher insurance premiums for banks.

The Big Picture

Economists are becoming increasingly concerned about the continuous upward trend in the budget deficit. They argue that, at some point, the heightened spending will impede the economy's long-run growth potential. Despite the relatively strong economic growth of recent years, Congress has not utilized this opportunity to reduce spending.

Expert Opinions

James Hines, economics professor at the University of Michigan, warns that the federal deficit is projected to reach 5% of GDP by 2027—an alarming figure. He also notes that by 2029, the debt held by the public will surpass levels observed during World War II.

To address this issue, Hines suggests that Americans will need to adapt to higher taxes and reduced government spending. He describes this as an unfortunate and challenging path during a recent panel discussion on the debt outlook hosted by the American Economics Association.

Market Reaction

Following the release of consumer inflation data earlier on Thursday, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) experienced a slight increase to 4.04%. Furthermore, stocks (SPX, DJIA) were lower in afternoon trading.

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