The US government posted a $3 billion budget surplus in January.

The US government posted a $3 billion budget surplus in January.  Yes, you read that right.  For the first time since 2008, the government collected more revenue than it spent.  Although this tiny monthly surplus does little to reverse the $290 billion deficit accumulated since October 2012, the fact that there was a monthly surplus at all, suggests that fears of a runaway deficit might be overblown, in our view.  Indeed, the nonpartisan Congressional Budget Office (CBO) estimates the budget deficit will shrink this fiscal year from $1.1 trillion to $845 billion, or 5.3% of gross domestic product (GDP), the smallest annual budget deficit since 2008.

A closer review of the US Treasury’s monthly statement reveals that the government collected $272 billion in receipts and paid out $269 billion, producing a $3 billion dollar surplus during the month of January.  This compares to a $27 billion deficit in January 2012.  The year-over-year difference was largely due to higher income taxes and payroll taxes, which were offset by a modest increase in government spending.  For example, personal income taxes, which represent 57% of budget receipts, rose by $22.5 billion, or 17%, likely benefiting from year-end bonuses and special one-time dividends paid in December.  Additionally, Social Security payroll taxes, which represented 24% of total receipts, grew $9 billion, or 16%.  This is due to the 2% increase in payroll taxes that were reinstated at the start of January, after the two-year holiday expired.

Meanwhile, government spending or outlays rose by just $7.5 billion or 3% year-over-year.  The biggest surge came from the Department of Health and Human Services (27% of outlays), which reported a 14%, or $9 billion increase in spending.  Medicaid grants to states and supplemental medical insurance benefits drove the lion’s share of this increase.  The Department of Defense, which represents 19% of the budget, saw spending increase 7% or $3.5 billion, despite ongoing fears of sequestration, or automatic spending cuts.  Recall that defense spending represents about half of the reductions under the Budget Control Act, which was supposed to be triggered at the start of the year, but was postponed to March 1st.

According to the Congressional Budget Office, the US budget deficit may be cut in half and dip below $500 billion by 2015.  This assumes that GDP expands from a projected 1.4% increase this year (vs. 1.9% in 2012) to 3.4% in 2014, while the unemployment rate dips from an average of 7.8% in 2012 to under 7% by 2015.  Further out, however, the picture isn’t as rosy.  An aging population, rising healthcare costs, and growing interest payments on the federal debt will put pressure on the budget.  As a result, the CBO anticipates the deficit could begin to steadily rise again in 2016 and approach the $1 trillion mark by 2023.  In other words, the near-term budget problems might not be as bad as the media portrays, but we haven’t escaped the long-term challenges.