Halfway Point of FY 2015 Shows Higher Deficit than FY 2014

The Congressional Budget Office (CBO) has released its Monthly Budget Review for March, rounding out the first half of Fiscal Year 2015. The report shows a first half deficit of $430 billion, $17 billion higher than the deficit reported for the same period in FY 2014. In its March baseline, CBO projected the FY 2015 deficit would be $486 billion, $1 billion higher than FY 2014; CBO doesn't indicate whether the actual totals so far are better or worse than expected.

Between FY 2014 and FY 2015, spending has grown by 6.6 percent while revenue has grown by 7.4 percent. Driving the growth in revenue are sizeable increases in individual and corporate income taxes as a result of economic growth. On the spending side, growth is driven by the Affordable Care Act's (ACA) coverage provision being in effect for the entirety of FY 2015 - unlike FY 2014, where it was not in effect for the first three months - and by lower offsetting receipts from profits received by Fannie Mae and Freddie Mac.

Compared to projections, both spending and revenue are growing faster than projected for the full year, although it is reasonable to expect both growth rates to slow during the year. This would happen for revenue because the remaining months would have the tax extenders in effect, which was not the case in FY 2014, and for spending because the remaining months would have the ACA coverage provisions in effect for both fiscal years, resulting in a more comparable level of spending.

The tax extender effect means that corporate income tax growth will likely come down, since it is experiencing growth so far that is 10 percentage points above what CBO projects for the full year. Similarly, Medicaid spending growth is well above its full-year projection, but that will come down as more months unfold with the Medicaid expansion being in effect for both fiscal years.

Medicare growth, after being very low last year, has also been 5 percentage points higher than full-year projections. CBO indicates that this growth is largely due to one-time payments made to prescription drug plans for unexpected spending growth in 2014 and for the use of electronic health records, so it may subside as the year goes on.

On a favorable note, net interest spending has declined by 14 percent compared to FY 2014 while it was expected to stay flat in full-year projections. CBO explains that the decline is due to unusually large principal reductions in inflation-protected securities, although interest rates staying lower than CBO expected surely also plays a role.

Projecting the budget is inherently uncertain even just a few months out. April is usually a large surplus month for the federal government, and it may be even more so this year because of the new individual mandate taxes and the reconciling of insurance subsidies with actual income data. We'll see how the budget matches up with CBO's expectations over the next six months.