Treasury: 2018 Deficit was $779 Billion

The Treasury Department today released a fiscal year-end report showing that the deficit for FY 2018 increased to $779 billion, a $113 billion (or 17 percent) increase from FY 2017. The deficit is 3.9 percent of Gross Domestic Product (GDP), also up from 3.5 percent in 2017. Not surprisingly, recent legislation plays a large role in the deficit increase.

The $113 billion increase in the deficit comes from largely flat revenue coupled with increasing spending. Revenue was up only $14 billion, or 0.4 percent. This revenue growth rate is the eighth lowest in the past 50 years, and the seven lower years either coincided with a recession or tax cuts/expiring tax increases enacted shortly after a recession. As we have noted, though, even this slight revenue growth understates how much the 2017 tax law is reducing revenue since the fiscal year totals include revenue raised from the pre-tax law code. Accounting for inflation or as a share of the economy, revenues were down 4 to 9 percent over the tax year. 

Given that many of April's tax payments are made for the previous year, another way to look at revenues is from May onward, where revenues are down 4.7 percent since last year.

Source: Congressional Budget Office.

Outlays were up $127 billion over FY 2017. Interest was the fastest growing portion of the budget, increasing nearly 24 percent since last year. Other areas of spending growing significantly were Social Security (4.5 percent) and defense (5.6 percent). Defense spending grew by a more rapid rate than recent years due to this year's budget agreement that increased the defense spending cap substantially.

The deficit would be even larger if it weren't for a quirk of the calendar. Since the first day of FY 2018 (October 1, 2017) fell on a weekend, monthly benefit payments that are typically made that day were instead made during last fiscal year. If there had been 12 monthly payments this year instead of 11, the annual deficit would have been about $820 billion.

Recent legislation is responsible for the deficit increase. CBO estimated that the tax law would cost $164 billion in FY 2018, which would account for more than the entire deficit increase. The spending deal (the Bipartisan Budget Act of 2018) was estimated to cost $68 billion, which would account for about 60 percent of the increase. Other deficit increasing legislation in FY 2018 added $32 billion to the 2018 deficit. These estimates suggest that if none of these laws were enacted, the deficit would have declined to about $515 billion this year. The tax bill and the spending deal are expected to cost more next fiscal year ($228 billion and $185 billion, respectively) as the deficit is expected to reach nearly $1 trillion.

The deficit increased significantly in FY 2018. It is expected to reach nearly $1 trillion next year and continue growing indefinitely unless Congress acts to put the budget on a more sustainable path.