During January, the federal government recorded a deficit of $50 billion, according to the monthly balance sheet [.pdf] released today from the Treasury Department. Last January, the monthly deficit was $43 billion, reflecting a $7 billion increase (or a 14% increase) in January 2011. While the deficit grew faster in January 2011 than in 2010, the deficit for the first four months of fiscal year 2011, which totals $419 billion, is $12 billion lower than the same period in fiscal year 2010. Despite this slight decline in the growth rate of the deficit for the current fiscal year, the federal deficit is now at $14.13 trillion.
A federal law prohibits the deficit from exceeding $14.3 trillion, yet the deficit is quickly approaching the legal limit. While Congress will likely pass a law to raise the debt ceiling, a major implication of the ever growing deficit is a rise in the monthly interest payments. In fact, payments on interest alone totaled $21 billion in January – this is 7.6% of all expenditures for the month. In January 2010, interest payments totaled $19 billion. Even though a $2 billion increase in January 2011 seems minuscule, a 10% increase in an interest bill is never a good sign.
Also, the reason why the deficit is slightly lower in fiscal year 2011 is not from decreased spending, but is from increased receipts, particularly from individual income taxes. Expenditures in January totaled $276 billion, whereas expenditures in January 2010 were $248 billion, resulting with an increase of $28 billion. Among the 28 major federal agencies, there are only seven agencies with less spending in January 2011 than in January 2010. The agency with the greatest increase is the Social Security Administration, with $32 billion more in January 2011. Through the first four months of fiscal year 2011, expenditures total $1.17 trillion and are $54 billion higher than the same period in 2010.
The seven agencies with decreased spending in January 2011 are the Department of Commerce, Department of Education, Department of Health and Human Services, Department of the Interior, Department of Labor, Department of Transportation, and the International Assistance Program. Through the first four months of fiscal year 2011, similarly, there are seven agencies with decreased spending, but these agencies include: the Legislative and Judicial Branches, Department of Education, Department of Labor, the Executive Office of the President, the International Assistance Program, and the Office of Personnel and Management. Clearly, spending is rising in a majority of federal agencies and does not contribute to the slight decrease in the growth rate of the deficit.
Receipts, on the other hand, were largely responsible for the slight decrease in the growth rate of the deficit and were $21 billion higher in January 2011 than January 2010. For the first four months of fiscal year 2011, there are $65 billion more in receipts than in the same period in 2010. Receipts from both individual and corporate income taxes have increased in 2011, but much more so for the former.
Individual income tax receipts were $25 billion higher in January 2011. For the first four months of fiscal year 2011, individual income tax receipts increased $74 billion (a 19% increase). Corporate income tax receipts increased $413 million in January 2011. During the first four months of fiscal year 2011, corporate income tax receipts increased $2.4 billion (a 5% increase). These facts show how an increase in individual income tax receipts is the major reason for the slight decrease in the growth rate of the deficit.
Individual income tax receipts took a noticeable boost in January 2011 because of the expiration of the Making Work Pay tax credit in December 2010. This tax credit was worth 6.2% of an individual’s earned income for those who make $75,000 or less, with a maximum credit of $400 per person. Though, the increase of tax receipts from the expiration of this tax credit was partially offset with the institution of a new tax credit. Within the tax bill recently passed in the lame duck session, social security taxes decreased 2%. As a result, social security taxes went from 6.2% to 4.2%, but this tax credit expires at the end of 2011. These adjustments in the tax code have led to the overall rise in individual tax receipts.
Without doubt, a rise in federal spending during fiscal year 2011 has been partially offset with a rise in federal receipts, particularly from individual payroll taxes, which has led to the slight decline in the growth rate of the federal deficit. Though, with rising interest payments, as well as a massive deficit approaching its legal limit, the federal budget is far from ideal.