Halfway Through the Year, FY 2016 Leads FY 2015 in Deficits

The Congressional Budget Office (CBO) released its Monthly Budget Review for March recently, so we now have data for the first half of Fiscal Year (FY) 2016. CBO shows that the deficit so far in FY 2016 is $457 billion, $18 billion higher than the FY 2015 deficit over the same time period. Both outlays and revenue have grown by 4.1 percent so far, but with spending at a higher starting point, that means higher deficits. Looking closer at the numbers reveals some trends about how the budget is changing this year.

The higher deficit that CBO has found so far in FY 2016 is not a surprise since in their most recent budget projections, they expected a $95 billion higher deficit for the year. Granted, about $37 billion of this increase is due to the fact that the start of FY 2017 falls on a weekend so some payments will be shifted into FY 2016, but the rest of the increase is due to the deficit-increasing legislation lawmakers have passed recently. That will reverse the trend of falling deficits since 2009 and send them back up almost continuously over the next decade. Note that the deficit in the first half of the year is almost all of the way to the projected full year deficit of $534 billion because April, June, and September tend to be big surplus months.

CBO also presents data on the major spending and revenue categories and how they have grown in the first six months of the fiscal year. Some of the more interesting trends are:

• Subdued revenue growth: Revenue had been growing at a very strong clip in the past few years as the economy recovered and some tax provisions expired, but revenue growth has been slower so far in FY 2016 at 4.1 percent, compared to a 9.9 percent average for FY 2013-2015. This slowdown applies to individual income taxes, payroll taxes, and especially corporate income taxes, which CBO attributes to lower taxable profits. The one exception is in "other" revenue, which has seen a jump in growth due to payments from the Federal Reserve's surplus account that were required by last year's highway bill.
• Large interest spending growth: Despite large growth in nominal dollar debt in recent years, interest spending has not grown commensurately as interest rates have remained very low. However, this year interest spending has grown by nearly one-fifth, but it is not due to an explosion of debt or a large rise in nominal interest rates. Rather, it is because falling oil prices in the early part of FY 2015 caused the principal for inflation-protected securities to dip, a development that has not occurred to the same degree in FY 2016. Short-term interest rates have also risen slightly compared to the first half of FY 2015 as the Fed has raised the federal funds rate (and plans to do so later this year), but the main culprit is deflation.
• Normalization in health care: Federal health care spending has grown at a relatively rapid pace in the past few years due to the anticipated bump from the implementation of the Medicaid expansion and health exchanges but also from a spike in prescription drug spending. This year, health care spending has fallen back to a more normal growth rate of 5 percent, compared to 9 percent from 2013-2015, as the Medicaid expansion and exchange subsidies have taken hold. Medicare spending growth has also been relatively slow this year at 4.4 percent after an uptick in 2015.
• Stabilization of other spending: Spending outside of health care and Social Security has generally been falling in recent years as the sequester and war drawdown have constrained discretionary spending and the recovery from the Great Recession has reduced safety net spending. This year, though, those categories have broken their fall. Defense spending, which had fallen every year since its peak in 2011, has been flat so far this year and is expected to increase slightly over the course of the year. Domestic spending is growing at nearly 3 percent this year after declining by 2.4 percent on average in the 2013-2015 period.

The first six months of FY 2016 show reversals or tempering of some of the budgetary trends in recent years. That includes the fall in deficits that will likely be reversed this year and in the coming years. Lawmakers will need to act to prevent that from happening.