Joe Biden's term began with a spending binge. It is ending with a budget fire. The deficit for the first three months of the 2024-2025 fiscal year – in other words, the fourth quarter of 2024 – reached a record $711 billion, $200 billion more than for the same period in 2024. Revenues reached only $1.08 trillion and would have to be increased by two-thirds to match spending ($1.79 trillion), according to figures released on Tuesday, January 14, by the US Treasury Department.

In detail, revenues stagnated due in particular to the decline in corporate income tax ($110 billion instead of $150 billion), while spending soared by more than 10%, or around $176 billion. Among the line items on the rise are healthcare ($75 billion), pay-as-you-go retirement ($29 billion), the military and veterans ($50 billion) and interest on the debt (an additional $20 billion).

This increase leads to a record estimate of the next annual budget deficit, which would reach $1.88 trillion, above the $1.83 trillion of 2023-2024. It is the highest deficit in history (if we exclude 2020-2021, the two years marked by the Covid-19 pandemic), or 6.2% of GDP. Such a figure during a time of growth, full employment and non-deployment of US troops abroad is a major signal that the US economy is in an untenable fiscal situation.

Drift

The four main spending sectors (defense, retirement, healthcare, and interest on debt) accounted for over 80% of federal spending last quarter. Their budgets are very tricky to cut: healthcare and retirement are taboo subjects that Donald Trump has promised not to touch. There may be room for maneuver in an area that Elon Musk has promised to tackle: defense. But this option is hardly compatible with Trump's desire to modernize his arsenal and military system, nor with his designated defense secretary, Pete Hegseth, who is eager to rediscover a "warrior" culture.

Interest on debt depends on the markets. Despite a one-point cut in overnight rates by the Federal Reserve since September 2024, the long-term rates used to finance the economy have not fallen. On the contrary, they have risen again, with the yield on 10-year government bonds reaching 4.8% compared with 3.6% when the Fed began its rate cuts in September. The 5% threshold crossed in October 2022, at the worst of the inflationary crisis, is not far off. Debt stands at nearly $36 trillion, or around 123% of GDP.

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