Last month, the federal government ran a surplus of $119 billion, the first monthly surplus since September 2019. The Fiscal Year 2022 deficit is slated to decline dramatically relative to 2021, and debt-to-GDP is likely to fall by the end of the fiscal year as well.
However, January’s surplus was largely the result of timing shifts and one-time events. Moreover, while deficits and debt-to-GDP are likely to fall in the near term due to waning COVID relief and rapid inflation, debt remains at a near-record level, and both are on course to grow rapidly in the near future.
Some helpful context:
Deficits will fall as temporary COVID relief ends, but debt will continue to grow
Annual deficits averaged nearly $3 trillion per year in 2020 and 2021, twice the previous record
More than $2 trillion per year of this borrowing was from temporary COVID relief, and CBO projects deficits will return to $1.15 trillion in 2022 as this relief expires
While deficits will fall, the national debt will continue to rise by well over $1 trillion this year and nearly $13 trillion over the next decade
January’s $119 billion surplus was largely a mirage
January is often a surplus month, as taxpayers pay quarterly estimated tax payments
Excluding timing shifts and one-time payments, the January surplus was just $14 billion, in line with the average over the decade before the COVID pandemic began
$81 billion of the official surplus was due to a one-time spectrum auction, while $24 billion was due to timing of payments that were scheduled to occur on a weekend or holiday
High inflation eroded current debt but not long-term fiscal challenges
High inflation reduced the value of outstanding debt – debt-to-GDP fell from 104 percent of GDP at the end of calendar year 2020 to 101 percent at the end of 2021
High inflation also increases future spending on programs like Social Security and interest on the debt – a one-point increase in annual inflation will increase debt by $1.7 trillion by 2031
High inflation will also lead the Federal Reserve to react more aggressively – a one-point increase in projected interest rates will increase debt by $2.1 trillion by 2031
Debt is expected to remain far above its historical average of 46 percent and will reach a new record as a result of population aging, rising health care costs, and rising interest rates
