May Monthly Budget Review

May 7, 2010

In the first seven months of fiscal year 2010, the federal government incurred a budget deficit of about $800 billion, the same as the shortfall at the same point in 2009, CBO estimates in its latest monthly budget review. Outlays and revenues alike are lower than they were last year at this time, by 3 percent and 4 percent, respectively. At the end of the spring tax-filing season, receipts of individual income taxes were less than CBO anticipated, but receipts of corporate taxes were greater. Consistent with its most recent baseline projections, CBO continues to expect that revenues and outlays will be higher at the end of fiscal year 2010 than they were the previous year.

Receipts in the first seven months of this fiscal year were about $56 billion (or 4 percent) lower than those in the same period last year, about twice the size of the decline anticipated by CBO in its 2010 baseline projections. As this year’s tax-filing season draws to a close, individual income tax receipts are about $55 billion (or 6 percent) lower than CBO expected. Corporate income tax receipts over the seven-month period, however, are about $30 billion (or 20 percent) higher than anticipated.

For the first seven months of fiscal year 2010, withheld income and payroll taxes declined by about $39 billion (or 4 percent) relative to receipts in the first seven months of 2009; that decline resulted from lower wages and salaries in the first half of the fiscal year and from the Making Work Pay credit, which was enacted in the American Recovery and Reinvestment Act (ARRA). Nonwithheld receipts of individual income and payroll taxes decreased by about 15 percent in the first seven months of the year, contributing another $39 billion to the decrease in total receipts. In addition, refunds of individual income taxes—primarily associated with 2009 tax returns—increased by $10 billion (or 5 percent). The $49 billion decline in nonwithheld receipts net of refunds, largely reflecting 2009 tax liabilities, probably results from greater-than-expected declines in nonwage income, such as capital gains, noncorporate business income, interest, and dividends in calendar year 2009.

Increases in revenues from other sources have offset some of the decline in individual income and payroll tax receipts so far this year. In particular, receipts to the Treasury from the Federal Reserve rose by $26 billion because of the central bank’s shift to longer-term, riskier, and thus higher-yielding investments in support of the housing market and the broader economy.

Receipts in March and April suggest that tax revenues may soon begin to rise again. In the past two months, withheld income and payroll taxes have been greater than in the same months last year, presumably reflecting a rebound in wages and salaries and a much smaller impact from the Making Work Pay credit. Net corporate receipts, which were below receipts through February 2009, are now $6 billion ahead of last year’s pace, at least in part because of larger-than-expected payments for 2009 liabilities and lower-than-expected refunds. CBO currently anticipates that receipts for the rest of the fiscal year will be in line with its March projection, which anticipated both higher withheld income and payroll taxes and higher corporate tax payments than the amounts collected last year.

Expenditures through April were about $56 billion (or 3 percent) less than those in the first seven months of 2009, CBO estimates. Net outlays for the Troubled Asset Relief Program, Fannie Mae, Freddie Mac, and federal deposit insurance have dropped sharply; other spending has increased by about $246 billion compared with outlays in the same period of 2009, an increase of 13 percent (after accounting for shifts in the timing of certain payments). Increased outlays for unemployment benefits, Medicaid, and refundable tax credits helped fuel that growth.