In February, the Budget deficit rose to $222.50 billion from $220.91 billion a year ago. As the budget deficit numbers are extremely seasonal, but not seasonally adjusted, that is the comparison that matters, not the month-to-month change (it was $49.80 billion in January for those of you who are interested, but do NOT read anything into the month-to-month change).

February is traditionally one of the largest budget deficit months. This is the second month where the effects of the lame duck session tax deal come into play. The deficit was above consensus expectations of $196.0 billion.

It is worth taking a step back and looking at the change in the deficit on a fiscal year-to-date basis. The 2011 fiscal year started on October 1, 2010. Since then, the Federal Government has spilled $641.26 billion worth of red ink. Without a doubt, that is a very large number, but it is also below the $651.60 billion worth of red ink in the first five months of fiscal 2010, a 1.6% decline.

Somehow I suspect that number will be totally ignored by most press accounts of the deficit. The silence was absolutely deafening when for all of fiscal 2010 the deficit proved to be $121.5 billion, or 8.6% lower than the deficit for fiscal 2009. Then again, it seems very rare for people who comment on the budget deficit to actually look at the numbers. The sound bites simply are not as good if you do that.

On-Budget vs. Off-Budget

The deficit is of course, the difference between what the government brings in from taxes, and what it spends. There are also two components to both sides, the on-budget revenues — spending and resulting deficit — and the off-budget revenues — spending and deficit or surplus. The on-budget portion is the vast majority of what you think of when it comes to the government: defense, federal employee salaries, food stamps, subsidies to farmers and agribusiness, interest on the debt, running the FDA, SEC and so forth. The off-budget portion is almost all Social Security (plus a few very minor things like railroad retirement funds, but they amount to a rounding error).

So let’s break things down a bit, and I will focus on the year-to-date numbers rather than the February-alone figures. My reason for doing so is twofold. Most importantly is the fact that the numbers in the report are far more detailed for the year-to-date numbers than they are for the month a year ago, and I’m frankly too lazy and it would take too much time to pull up the year-ago report. The second is that the year-to-date figures present a much more complete picture of what is happening with the Federal Budget.

Total government revenues rose by $3.14 billion for the month from a year ago to $110.66 billion, a 2.9% increase. Year to date, revenues are up by $68.46 billion to $869.00 billion or by 8.6%. Total outlays for the month though increased by $4.73 billion or by 1.4%. Fiscal year to date, spending is up by $58.12 billion, or by 4.0%.

Breaking things down further to the on- and off-budget portions, year-to-date on-budget revenues (mostly from income taxes) are up by $89.48 billion, or 16.4% to $635.03 billion. Off-budget (again, mostly Social Security) revenues are down by $21.01 billion or by 8.2%.

The lame duck session tax deal was specifically designed to reduce the off-budget receipts, but cutting the individual side of the payroll tax by 2%, from 6.4% to 4.4%. That has, however, only been in effect since the start of the calendar year, not since the start of the fiscal year. The employer side of the payroll tax was not affected and remains at 6.4%. Off budget outlays have declined by $4.0 billion year to date, or by 1.9%.

Year to date, the off-budget side is running a surplus of $24.88 billion, although that is down from a $41.93 billion surplus in the first four months of fiscal 2010. The payroll tax cut was designed to reduce Social Security receipts, and in February it succeeded, with an off-budget deficit of $7.8 billion.

Revenues Up = Economy on the Rebound

The increase in overall revenues is very good news. It has not occurred due to any increase in tax rates or because of any new taxes. Tax rates have on balance been cut rather significantly in recent years, including the payroll tax cut. I’m talking about Federal taxes here, not state or local taxes, which might have been increased as States grapple with their own fiscal challenges.

For example, almost one third of the ARRA, or Stimulus Act, was tax cuts. Almost a quarter of it went to aid State and Local Governments so they would not be forced to raise taxes (or at least minimize the tax hikes and spending cuts they would be forced to make).

The improvement is simply a reflection of an economy that is starting to recover. More income means higher income taxes, and more people on payrolls means higher payroll taxes. While total tax receipts are up nicely over a year ago, they are up only by $8.2 billion from the first five months of fiscal 2009 (up 1.0%) but are down a whopping $98.15 billion or 10.15% from the first four months of fiscal 2008, before the Great Recession really took hold.

Keep in mind, that these are nominal numbers, not adjusted for inflation. While inflation has been low in recent years, it has not been non-existent. As with so many things, tax revenues are improving, but remain far from the previous peaks. We are on the right path, but the road ahead is a long one.

All of the improvement in revenues has come on the on-budget side, and more specifically from individual income tax collections. Year to date they are up by $88.84 billion, or 26.6% to $422.84 billion. Corporate tax receipts are actually down by $7.21 billion or 15.9%. This is in spite of corporate profits booming.

For example, in the fourth quarter, the total net income of the S&P 500 was 30.5% higher than in the fourth quarter of 2009. For all of 2010, the S&P 500’s total net income was up 44.7%. The complaints you hear all of the time on CNBC about how high U.S. corporate taxes are hurting the economy are entirely unfounded.

For all the whining about the high U.S. corporate tax rates, businesses are not paying an awful lot in actual taxes. They are far more likely to take advantage of various loopholes, deductions and credits than are individual tax payers. As a result, the effective tax rates are much lower than the statutory rate.

A strong case could be made for lowering the stated tax rate, but only if we do away with many of the corporate tax loopholes. For more on the diverging trends between corporate profits, and the taxes paid on those taxes see: “Corporate Income Rises, Corporate Taxes Don’t”

Spending

What about the spending side? It has been increasing each year. In the first four months of this fiscal year it is up by $58.1 billion, or 4.0%. The really big increase in spending came in fiscal 2009 relative to fiscal 2008, when spending in the first four months jumped by $218.9 billion or 17.8%. So relative to fiscal 2008, which was before the recession hit, the deficit is up by $376.7 billion (five months to five months). Of that, $98.15 billion is due to lower revenues (26.1%) and $278.6 billion (73.9%) is due to higher spending.

Virtually all of the spending increase though took place from fiscal 2008 to fiscal 2009. Relative to fiscal 2009, spending in the five months is up by just $59.7 billion or 4.1%. By the way, four of the first five months of fiscal 2009 were under President Bush, not President Obama. Relative to the first four months of fiscal 2009, the deficit has increased from $589.8 billion to $641.3 billion, an increase of $51.5 billion, or 8.72%. Of that, $15.2 billion is due to lower revenues, and $8.0 billion is due to higher spending.

The narrative that the budget deficits are all due to wildly increased spending under Obama is a fairy tale and simply not supported by any evidence. This is particularly true of the sub-narrative that all the spending is Obama “spreading the wealth around” by spending on social programs.

Based on the year-over-year comparisons year to date, where do we see spending increasing? Of the $58.1 billion total increase, the Pentagon increased its spending by $7.5 billion to $281.4 billion, a 2.7% increase. Spending at the VA is up by $5.3 billion. Spending at Health and Human Services did rise by $16.0 billion, but that was all due to higher costs for Medicare and Medicaid, up $20.0 billion. Clearly we have not yet gotten a handle on rising costs in those programs, but they are also entitlements which the administration has very little direct control over.

Interest on the national debt is another area that Obama has little control over. It increased by $10.0 billion to $191.1 billion, an increase of 5.5%. One place where the “spreading the wealth around” narrative might have a bit of validity is in the Food Stamp and other nutrition assistance programs where spending is up $3.3 billion relative to a year ago.

On the other hand, we have almost six million people who have been out of work for more than six months, and many of those are starting to lose even their extended unemployment benefits. I’m sorry, but I don’t see having a substantial portion of the population severely malnourished as being a good thing for the economy.

Report Card: C-

This report was a bit worse than expected. Yes, the deficit for the month was higher than last year, but we knew that was going to be the case when Obama and the GOP leadership reached a deal on taxes during the lame-duck session. The fiscal stimulus from the payroll tax is one of the key reasons why we have started to see job creation start to pick up again. That, in turn, is a key reason why we are seeing revenues increase.

The rise in individual income tax revenues is strong evidence that the economy is on the mend. It was not due to any change in tax policy; there simply have not been any major changes in individual tax rates or the elimination of any significant deductions over the last year.

The only explanation then is that people have more income. I would point out that it is the rich, and the upper middle class that pay the lion’s share of the individual income taxes. The increase in individual income tax revenues is much higher in percentage terms than the increase in Personal Income (see “Personal Income Jumps on Tax Cut”). The much-faster rise in individual income tax collections would seem to confirm that the rich are seeing their incomes rise much more than the median income.

By the time one figures in the earned income tax credit, the bottom half of the income distribution pays very little in the way of individual income taxes. That is not to say they don’t pay taxes. Those who make the case that the poor don’t pay taxes are not being straight with you. It is just one specific tax that they don’t pay. They still pay sales taxes, and very significantly payroll taxes. The “poor don’t pay taxes” argument is no more valid than saying that Mormons don’t pay taxes when the only taxes you are looking at are the excise taxes on liquor and cigarettes.

In fact, the poor have been “subsidizing” the rich for about 30 years now. The poor and middle class are the ones that pay the vast bulk of payroll taxes (economically there is zero difference between the “employer side” of the payroll tax and the employee side, and effectively all of it is paid by the individual, the split is mostly a accounting and political positioning thing).

They have been paying extra to build up the Social Security trust fund, which is now getting to be close to $3 billion. One cannot claim that “the trust fund does not exist, it is just a bunch of worthless IOU’s” and then at the same time quote figures about how the wealthy pay most of the taxes in the country, only looking at the income tax. Doing so is intellectually dishonest.

If it is used as an excuse to cut Social Security benefits (and raising the retirement age IS an across the board cut in benefits) then it goes beyond being intellectually dishonest, and amounts the biggest rip-off in the history of the world. Since it is a simple fact that if you are poor in America you are much more likely to die an early death, it is one that will hit the poor much more than the rich.

Currently the debate in D.C. is all about how much to cut domestic spending. If the House bill that cuts $61 billion from domestic discretionary spending (only 12% of the overall budget) for the last half of fiscal 2011 is enacted, the economy will slow down again. That will result in hundreds of thousands of fewer jobs (Mark Zandi, a top advisor to the McCain Campaign has put the job losses at 700,000 over the course of the rest of 2011 and 2012). That, in turn, will slow down revenue growth. The net result will be far less than a $61 billion reduction in the deficit.
 
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