Tax increases help take $231bn off US budget deficit

8 May 13

The US budget deficit for the seven months to the end of April has fallen by almost a third compared with last year, the Congressional Budget Office said yesterday.

Increased revenues and, to a lesser extent, reduced government spending, combined to give a shortfall of $489bn for October–April, according to the CBO's Monthly budget review. This is $231bn less than the $720bn deficit recorded over the same seven months in the 2012 fiscal year. The US fiscal year runs from October to September.

The CBO, which provides the US Congress and its budget committees with impartial budgetary and economic information, estimates there will be a $112bn surplus in April. This is almost double the $52bn posted in 2012. Historically, April is a strong month for the federal budget because of the ‘substantial’ income tax payments made that month. However 2012 and 2013 were the only years where an April budget surplus has been posted 2008.

Over the seven months to the end of April, tax receipts were up $220bn on the same period last year. Most of this came from a 16% rise in income and payroll tax revenues, worth $184bn.

The CBO directly attributed the increase to tax rises and tax rate changes introduced in January . These were part of the cross-party Congress deal that averted the bulk of the US 'fiscal cliff, a series of across-the-board automatic tax rises and spending cuts.

‘Taxes withheld from workers' pay-checks rose by $99bn (or 9%), mainly because of higher wages and salaries, the expiration of the payroll tax cut in January 2013, and increases (beginning in January) in tax rates on income above certain thresholds,’ it said in its analysis.

Federal government spending was down 2%, or $41bn, on the period October–April in 2012, with defence spending down 5%, or $20bn. Defence is expected to bear the brunt of the $85bn automatic spending cuts that did take place as a result of the fiscal cliff, known as sequestration. They took effect on March 1 after being successfully postponed from January 1.

However, spending on the government’s largest welfare and benefit programmes – Social Security, Medicare and Medicaid – increased. Outlays for Social Security were up $25bn, or 6%, for Medicare they increased by $15bn (6%) and for Medicaid spending increased by $10bn (7%).