The U.S. Treasury Department announced Monday that it expects to borrow $760 billion in the first quarter of 2024, $56 billion less than its previous estimate made in October. The lowered borrowing estimate comes as the federal budget deficit continues to shrink amid higher tax revenues and stable government spending.
Key Highlights
- The Treasury plans to borrow $760 billion in Q1 2024, down from its October estimate of $816 billion
- The federal budget deficit fell to $1.4 trillion in fiscal year 2023, a $400 billion drop from the prior year
- Higher tax revenues from corporations and more high-income individuals has boosted federal coffers
- Government spending has remained stable even as inflation drives up costs
- Investors cheered the lower borrowing plans, sending stocks higher and bond yields down
Budget Deficit Continues to Shrink
The federal budget deficit peaked at a record $3.1 trillion in fiscal year 2020 due to massive pandemic aid spending. It remained high at $2.8 trillion in 2021 before falling to $1.4 trillion in 2022. Higher tax revenues, mostly from corporations, have been the primary driver of the shrinking deficit.
“Tax payments from businesses continue to surge, pushing corporate tax receipts to their highest level since 2007,” said Treasury Secretary Janet Yellen. “And more high top-bracket earners faced the Alternative Minimum Tax, further boosting overall collections.”
The Treasury took in $1.9 trillion in tax revenues in fiscal 2023, up $340 billion from the prior year. Meanwhile government spending has remained relatively stable at around $6 trillion despite high inflation driving up costs.
| Federal Budget Deficit | 2021 | 2022 | 2023 |
|---|---|---|---|
| Deficit Amount | $2.8 trillion | $1.4 trillion | $1.4 trillion |
| Federal Tax Revenue | $1.6 trillion | $1.9 trillion | $1.9 trillion |
| Government Spending | $6.1 trillion | $6.0 trillion | $6.0 trillion |
Lower Borrowing Boosts Markets
Equity and bond investors welcomed the Treasury’s lower borrowing plans, taking it as a sign of improving fiscal conditions.
The S&P 500 index jumped over 1% immediately following the announcement Monday morning. Lower Treasury supply often leads to lower bond yields, making equities more attractive by comparison. It also gives the Federal Reserve more room to combat inflation without worrying as much about rising borrowing costs.
The 10-year Treasury yield, which influences mortgage rates and other consumer loans, fell 8 basis points on the news. Analysts say yields likely would have risen if borrowing estimates stayed high or increased further. The lower supply could relieve some upward pressure on rates in the near-term.
Treasury Sees No More Supply Increases
While Treasury borrowing spiked to finance trillions in stimulus spending during 2020 and 2021, financing needs are now returning closer to normal pre-pandemic trends.
The Treasury said Monday it expects to maintain current auction sizes for notes and bonds going forward instead of further increases. Some Wall Street analysts predicted Treasury may need to continue upping issuance to fund wide deficits.
Maintaining the status quo on auction sizes, for now, signals Treasury officials see federal finances stabilizing. This could take pressure off the bond market if investor demand can keep up with supply at current levels.
However, Treasury said fiscal conditions remain uncertain for the second half of 2024. Officials will monitor federal spending and revenue trends closely when making borrowing decisions for future quarters.
What Happens Next?
While deficit forecasts keep moving in the right direction, federal finances aren’t out of the woods yet. Government debt held by the public stands at over $24 trillion today – equivalent to 98% of annual economic output. That is double the debt-to-GDP ratio prior to the pandemic.
Economists say persistent deficits in coming years, even if they stay below $1 trillion, mean the debt load will continue expanding faster than the overall economy. There are also risks spending could spike again if another recession hits or new legislation passes Congress.
For now, investors and policymakers are breathing a sigh of relief. But paying down the vast public debt will likely dominate fiscal policy debates for years if not decades to come. The long path back to more sustainable footing will require tough choices on taxes and spending that test lawmakers’ political will.
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