The US government reported that its fiscal 2022 budget deficit plunged by half from a year earlier to $1.375 trillion, due to fading COVID-19 relief spending and record revenues fueled by a hot economy, but student loan forgiveness costs limited the reduction.

The US Treasury said the $1.400 trillion reduction in the deficit was still the largest-ever single-year improvement in the US fiscal position as receipts hit a record $4.896 trillion, up $850 billion, or 21 per cent from fiscal 2021.

President Joe Biden touted the deficit reductions in remarks at the White House, chiding Republicans for talking but doing nothing about shrinking the deficit. He also said his administration lowered the deficit while boosting spending on infrastructure and expanding benefits for middle- and low-income Americans.

“You know, we’ve gone from an historically strong economic recovery to a steady and stable growth, while reducing the deficit,” Biden said.

Outlays for fiscal 2022, which ended Sept. 30, fell by a record $550 billion, or 8 per cent from last year to $6.272 trillion. But the outlays for September, the fiscal year’s final month, included the recognition of $430 billion in costs from the Biden administration’s plan to forgive student debt of up to $20,000 for former college students now earning under $125,000 a year and under $250,000 for married couples.

The move brought the September budget deficit to $430 billion, more than six times the prior-year September deficit of $65 billion. In most years, September is a surplus month due to the payment of quarterly corporate and individual taxes.

The Congressional Budget Office estimated that the plan would cost about $400 billion. It also includes the extension of a COVID moratorium on all student loan payments until the end of 2022, which added about $21 billion in budgetary costs.

Non-governmental budget analysts have estimated that the plan would wipe out a much-touted deficit reduction from Democrats’ recently enacted climate, healthcare and Internal Revenue Service funding bill.

US Treasury Secretary Janet Yellen told reporters that the Biden administration was maintaining a “credible fiscal policy” despite the unfunded student debt relief that was a Biden campaign promise.

“I do see our debt as being on a responsible path,” she said, adding that net interest on the debt as a share of GDP was forecast to only rise to about 1 per cent, a “low” historical level.

Revenue gains during September started to slow from prior months, growing only 6 per cent from a year earlier to $488 billion.

And the CBO is projecting that with the economy slowing further amid higher Federal Reserve interest rates, revenues will slow further in future years. Rising interest costs also will start to consume a bigger share of the federal budget, the non-partisan fiscal referee agency predicts.

Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, a fiscal watchdog group, said the effect of recognizing the student loan forgiveness costs in fiscal 2022 will be to show a steadier decline in deficits from the pandemic - rather than a sharper narrowing to around $1 trillion, followed by an increase to around $1.4 trillion for fiscal 2023.

The CBO had forecast a fiscal 2023 deficit of about $984 billion, with deficits rising steadily thereafter to nearly $2 trillion by 2030.

“I think it’s more appropriate to recognize the costs as the debt is being canceled, and the bulk of that will happen in fiscal 2023. But the government has latitude here,” Goldwein said in a phone interview prior to the release.

Meanwhile the US Treasury Secretary Janet Yellen said that inflation was not becoming “embedded” in the US economy and domestic investments in semiconductors and research would help increase US productive capacity.

Yellen, speaking to reporters at a technology business incubator near Dulles International Airport, said she sees no signs of higher inflation expectations over the medium term being built into wages and prices.

“I don’t believe it’s becoming embedded in the US economy,” she said of inflation when asked about recent

Consumer Price Index data

showing persistent increases in non-food, non-energy core inflation factors, including rents.

Yellen said the report showed more work was needed to bring inflation down, but there also were some early signs of producer costs easing, in metrics such as supplier deliveries and shipping costs, which “would feed into lower inflation over time.”

In another campaign-style economic speech at the Virginia Innovation Partnership Corp, Yellen said investments such as President Joe Biden’s $430 billion energy and health legislation would reduce some costs for Americans and bring down inflation over time by increasing the US economy’s productive capacity.