Last week the Congressional Budget Office (CBO) released its Monthly Budget Review showing that in March 2023, the federal government incurred a deficit of $376 billion, $114 billion more than the actual deficit in February and $183 billion more than the shortfall recorded in March 2022. CBO’s report also estimates that the federal budget deficit reached $1.1 trillion through the first half of fiscal year that began on October 1 – $430 billion higher than last year at the same period.
Compared to the first six months of FY 2022, the rise of the deficit is explained by a 3 percent decrease in revenues while outlays rose by 13 percent.
Revenues
Total revenues decreased by $73 billion due largely to an 8 percent drop in individual income taxes as refunds in the initial part of this year’s tax season were $68 billion more than at this point a year ago.
Another factor was that remittances to the Treasury from the Federal Reserve decreased from $61 billion last year to less than $1 billion. As explained by a blog post from the Federal Reserve Bank of St. Louis, “The yearly remittances to the Treasury are essentially the leftover Fed revenue after operating expenses. By law, this additional revenue must be turned over to the Treasury.” According to CBO analysis, these remittances fell this year due to “higher short-term interest rates” that raised “the central bank's interest expenses above its income.”
On the other hand, net receipts from payroll and corporate income taxes increased, by $62 billion and $13 billion respectively.
Outlays
The federal government spent $3.1 trillion between October and March – $357 billion more than during the same period last year. A large contributing factor is an increase in outlays for Social Security, Medicare, and Medicaid increased by $141 billion. Social Security spending rose because of an increase in beneficiaries and an increase in the average benefit payment linked to the cost-of-living adjustment. Medicare and Medicaid outlays’ increases are also due to growth in the number of beneficiaries, as well as higher costs for health care.
Lawmakers should also note that outlays for interest on public debt rose significantly. Higher interest rates raised costs for financing the debt by $90 billion – 41 percent more than a year ago.
One minor factor is a shift in certain payments because the first days of the fiscal year 2023 and the first day of the second half of the fiscal year were on a weekend. CBO notes that if these shifts did not occur, the deficit in the first half of fiscal year 2023 would have been $10 billion smaller.
In the budget outlook published in February, CBO projected that the federal government would have a $1.4 trillion deficit for the whole fiscal year 2023. Six months into the fiscal year, outlays are running ahead at 51 percent of the projected amount for the fiscal year, while revenue is behind at only 43 percent of the total estimated for the fiscal year.
Despite the claims of deficit reduction enacted in the Inflation Reduction Act, the government’s budget shortfall is worse than it was a year ago at the middle point of the fiscal year. CBO just announced today that it will update its 10-year budget baseline on Friday, May 12. This report will reveal whether the fiscal outlook has improved or worsened since February. Regardless, without reforms to restrain spending, deficits will continue to rise, and interest costs will add to the burden of financing the debt.