In January, the Budget Deficit rose to $49.8 billion from $42.6 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 $78.1 billion in December for those of you who are interested, but do NOT read anything into the month-to-month change).

This is the first month where the effects of the lame duck session tax deal come into play. While it is hard to paint a 16.9% increase in the budget deficit year over year as good news, it is worth pointing out that the number was well below the consensus forecast of a deficit of $59.5 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 $418.8 billion worth of red ink.

Without a doubt, that is a very large number, but it is also below the $430.9 billion worth of red ink in the first four months of fiscal 2010, a 2.8% 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.

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).

Breaking Down the Numbers

So let’s break things down a bit, and I will focus on the year-to-date numbers rather than the January 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 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 $21.4 billion for the month from a year ago to $226.6 billion, a 10.4% increase. Year to date, revenues are up by $65.4 billion to $758.4 billion or by 9.4%. Total outlays for the month though increased by $28.4 billion or by 11.5%.  Fiscal year to date, spending is up by $53.4 billion, or by 4.8%.

Breaking things down further to the on- and off-budget portions, year-to-date on-budget revenues (mostly from income taxes) are up by $80.4 billion, or 16.5% to $567.5 billion.  Off-budget (again, mostly Social Security) revenues are down by $15 billion or by 7.3%. 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 increased by $8.7 billion year-to-date, or by 5.5%. Still, year-to-date, the off-budget side is running a surplus of $25.2 billion, although that is down from a $49.0 billion surplus in the first four months of fiscal 2010. Even in January, with the payroll tax cut in place, the off-budget side (again, almost all Social Security) ran a surplus of $2.3 billion.

Revenues Up = Good News

The increase in 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. 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.

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 still down by $15.2 billion from the first four months of fiscal 2009 (down 1.97%) and are down a whopping $103.1 billion or 11.97% 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.

Spending Continues to Increase

What about the spending side? It has been increasing each year. In the first four months of this fiscal year it is up by $53 billion, or 4.7%. Total spending in the first four months or fiscal 2010 was actually down by $45 billion or 3.8% relative to the first four months of fiscal 2009.

The really big increase in spending came in fiscal 2009 relative to fiscal 2008, when spending in the first four months jumped by $219 billion or 23.1%. So relative to fiscal 2008, which was before the recession hit, the deficit is up by $330.8 billion (four months to four months). Of that, 103.1 billion is due to lower revenues (31.5%) and $226.6 billion (68.5%) 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 first four months is up by just $8 billion or 0.7%. By the way, the first four months of fiscal 2009 were under President Bush, not under President Obama. Relative to the first four months of fiscal 2009, the deficit has increased from $395.9 billion to $418.8 billion, an increase of $22.9 billion, or 5.83%. Of that, $15.2 billion is due to lower revenues, and $8.0 billion is due to higher spending.

Current Narrative a Fairy Tale

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? Well, the Pentagon increased its spending by $9.1 billion to $234.1 billion, a 4.0% increase. Spending at the VA is up by $4 billion or 11.3%. Spending at Health and Human Services did rise by $10.4 billion, or 3.8%, but that was all due to higher costs for Medicare, up $15.3 billion, and higher payments to the states for Medicaid, a $8.6 billion increase. 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.

One place where the “spreading the wealth around” narrative might have a bit of validity is in the Food Stamp program where spending is up $2.4 billion relative to a year ago.

Better Than Expected

This report was much better 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 big surprise is how much revenues have increased over last year, especially individual tax revenues. In the first four months of the year they are up by $73.7 billion from fiscal 2010, a 23.7% increase. Corporate income taxes are also up, but only by $2.4 billion or 5.9%.

Given the sharp rise in corporate profits (full year net income for the S&P 500 is now expected to be 43.7% higher in 2010 than in 2009), the increase is a bit disappointing. 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 loop holes.

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 Income, Spending Rise; Savings Fall). 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.
 
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