Budget deficit still in good shape, and not a drag on our growth

The Federal Fiscal Year ends a week from Friday, and I wanted to give you an update on the most recent monthly budget report from the Congressional Budget Office (CBO). At first glance, it seemed like we were seeing the deficit grow in August for the first time this year after a sizable cut in that number for most FY 2022. But there was an easy explanation for that.

The federal government incurred a deficit of $217 billion in August 2022, CBO estimates— $47 billion more than the deficit recorded last August. Revenues and outlays were higher this August than they were a year ago. Outlays in August 2021 were affected by a shift in the timing of certain federal payments that otherwise would have been due on August, 1, 2021, which fell on a weekend (those payments were made in July 2021). If not for those shifts, the August 2022 deficit would have been $13 billion less than the deficit in August 2021.

Ah, so that explains it. When you combine July and August to remove those distortions, the US budget deficit has shrunk by a little more than $42 billion, or 8.9% ($472.7 billion in 2021, $430.6 billion in 2022). And August’s picture seems especially OK when you break down the individual numbers, which show a sizable increase in tax receipts, with an increase in expenses that is smaller than the rate of inflation.

CBO estimates that receipts in August totaled $304 billion—$36 billion (or 13 percent) more than in the same month last year—primarily because receipts of individual income and payroll taxes grew by $34 billion (or 15 percent). The largest source of that increase was amounts withheld from workers’ paychecks, which rose by $22 billion (or 10 percent). The net collections of those taxes also were boosted by a decline in refunds of individual income taxes, which were $8 billion (or 44 percent) lower than they were in August last year. Unemployment insurance receipts increased by $3 billion (or 42 percent). Revenues from all other sources rose by $2 billion, on net.

Outlays in August 2022 totaled $521 billion, CBO estimates. If not for timing shifts that decreased spending in August 2021, outlays in August 2022 would have been $22 billion more than in August 2021, an increase of 4 percent.

With one month to go, the CBO says the budget deficit is at $944 billion for FY 2022, which is the lowest deficit since 2019 - the last fiscal year before COVID-era assistance programs were put in place.

The CBO said there is one final wild card in figuring out what the final deficit figure might be.

Ordinarily, with just one month left in the fiscal year, projecting the annual deficit would be relatively straightforward. This year, however, the announced changes to the student loan program add significant uncertainty because they may lead to the recording of substantial outlays in September. Under the Federal Credit Reform Act, the estimated long-term effects of such changes to the terms of outstanding loans are recorded as an increase in outlays in the month when those terms are changed. This year, both the timing and the amounts of the changes to the student loan program are uncertain. Without the changes to student loans, CBO’s projection of the 2022 budget deficit would be about $1.0 trillion, compared with a $2.8 trillion shortfall last year. If significant numbers of student loans are modified in September, the 2022 deficit could be considerably larger than CBO has estimated. Some of the announced changes (such as the changes to income-driven repayment plans) will increase deficits in future years.

Given that student loan recipients aren’t likely able to even apply for relief until next month, it is possible (if not outright likely) that the full-year deficit for 2022 will be below $1 trillion. That would be the first time in 4 years we’ve had a deficit under 13 figures, and reiterates that 2022’s inflation has little to do with “government spending” or our budget deficit.

What's especially noteworthy is the 15% drop in outlays compared to 2021, and it is largely due to the end of many COVID-related boosts in assistance.

Outlays for certain refundable tax credits totaled $281 billion—a decrease of $469 billion, or 63 percent. That reduction occurred largely because most of the second and third rounds of recovery rebates were paid in January and March 2021. Partially offsetting that decrease was higher spending on the child tax credit and the premium tax credit.

Outlays for unemployment compensation decreased by $346 billion because enhanced benefits that had been enacted earlier in the pandemic expired in September 2021 and because the number of people receiving unemployment benefits declined.

Which is how it’s supposed to work, right? The depressed economy recovers, and the stabilization/stimulus measures go away. That demand has kept up to the point that we are now dealing with shortages in labor and supplies instead of slack illustrates how strong the underlying economy as th3ese supports have ended.

But there is one expense that has grown in FY 2022 - and it would be the only reason that you should really care about the deficit these days.

Net outlays for interest on the public debt increased by $121 billion (or 32 percent), primarily because higher inflation this year has resulted in large adjustments to the principal of inflation-protected securities.

And because the Federal Reserve seems bent on jacking up interest rates to reduce inflation to a low number, no matter how much it damages asset markets or the real economy, that interest cost is likely to stay high and/or grow with new debt that gets issued.

Still, that higher expense won't be a level that should limit other parts of the US budget, and the US dollar remains at multi-decade highs. But if GOPs like Ron Johnson starts crying crocodile tears over the deficit, then we can unwind the GOP Tax Scam that blew up the deficit in the first place, especially the giveaways to the rich, and that number will fall real fast.