The US Treasury Department announced on Monday that it expects to borrow $776 billion in the fourth quarter of 2023, a record high for the period and a 35% increase from the same quarter last year. The unprecedented borrowing reflects the ongoing fiscal challenges posed by the COVID-19 pandemic, the economic recovery efforts, and the looming debt ceiling deadline.
The Treasury said that the borrowing estimate is based on several assumptions, including that Congress will raise or suspend the debt limit before December 3, when the extraordinary measures to avoid default will be exhausted. It also assumes that the government will spend $1.75 trillion on the Build Back Better plan, which is still being negotiated in Congress and faces opposition from some moderate Democrats.
The borrowing estimate is $271 billion higher than what the Treasury projected in August, when it expected to borrow $505 billion in the fourth quarter. The Treasury said that the increase is mainly due to higher outlays and lower receipts than anticipated, as well as changes in cash balance assumptions.
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The Treasury also said that it expects to end the quarter with a cash balance of $800 billion, which is the level that it considers sufficient to meet its operational needs and potential contingencies. The cash balance at the end of September was $433 billion.
The $776 billion borrowing estimate for the fourth quarter is the highest ever for the period, surpassing the previous record of $573 billion set in the fourth quarter of 2020. The Treasury borrowed $673 billion in the third quarter of 2023, and $1.9 trillion in the first half of the year.
What are the implications of this massive borrowing on the economy? There are several possible effects, both positive and negative, depending on how the borrowed funds are used and how the debt is managed.
On the positive side, borrowing can help finance public investments that boost productivity, such as infrastructure, education, and research. Borrowing can also stimulate aggregate demand and output in the short run, especially when the economy is operating below its potential. Borrowing can also provide a cushion for households and businesses that are facing income losses or liquidity constraints due to the pandemic.
On the negative side, borrowing can increase the public debt burden and raise interest rates in the long run, crowding out private investment and reducing economic growth. Borrowing can also create fiscal risks and vulnerabilities, especially if the debt is denominated in foreign currency or held by foreign creditors. Borrowing can also generate inflationary pressures if the money supply grows faster than the output.
The net effect of borrowing on the economy depends on several factors, such as the size, duration, and composition of the borrowing; the fiscal and monetary policy stance; the state of the business cycle; and the expectations of consumers and investors. The optimal level of borrowing is not easy to determine, as it involves trade-offs between short-term benefits and long-term costs.
The US Treasury Department said that it plans to issue more long-term bonds to take advantage of low interest rates and extend the average maturity of the debt. It also said that it has enough cash and borrowing capacity to meet its obligations until December 3, when the debt ceiling suspension expires. The debt ceiling is a legal limit on how much the federal government can borrow. Congress will have to raise or suspend the debt ceiling again to avoid a default on US debt, which could have catastrophic consequences for the economy and financial markets.
The US Treasury Department’s borrowing announcement comes amid ongoing negotiations between President Joe Biden and Congress over his $3.5 trillion social spending plan, which would expand health care, education, childcare, and climate programs. The plan would be partly financed by tax increases on corporations and wealthy individuals. However, some moderate Democrats have expressed concerns about the size and scope of the plan, as well as its impact on inflation and debt.
The US economy grew at an annualized rate of 6.7% in the second quarter of 2023, according to the latest estimate by the Bureau of Economic Analysis. However, the recovery has been uneven and uncertain, as new variants of the coronavirus pose challenges for public health and economic activity. The Federal Reserve has maintained its accommodative monetary policy stance, keeping its benchmark interest rate near zero and continuing its asset purchase program. The Fed has signaled that it may start tapering its bond-buying later this year, depending on the progress of the economy and inflation.
The soaring borrowing needs have raised concerns about the sustainability of the US debt, which stands at nearly $29 trillion, or about 125% of GDP. The Congressional Budget Office has warned that high and rising debt levels could increase the risk of a fiscal crisis, reduce national savings, and lower future income growth.