Surging tax revenues as the U.S. economy rebounded from the coronavirus-driven downturn helped reduce the budget deficit for the fiscal year that ended Sept. 30, the Treasury Department and White House budget office announced Friday.
The fiscal 2021 deficit clocked in at a still-massive $2.8 trillion, although that’s down $360 billion from the previous year’s shortfall and it’s $897 billion less than the Biden administration predicted in February.
Before the COVID-19 pandemic, a $2.8 trillion deficit would have sent shock waves through Capitol Hill, where fiscal hawks had expressed alarm at trillion-dollar shortfalls. But the modest decline from a $3.1 trillion fiscal 2020 deficit reflects renewed optimism that the worst days of the pandemic are in the rearview mirror.
“Today’s joint budget statement is further evidence that America’s economy is in the midst of a recovery,” Treasury Secretary Janet L. Yellen said in a statement, calling the better-than-expected numbers “a direct result” of the administration’s COVID-19 management and a big aid package enacted in March.
The decline from the previous year’s shortfall was due partly to a surge in federal revenues. Tax receipts, which swelled past $4 trillion, reached their highest level as a share of the economy in 20 years. Revenue exceeded White House budget estimates by $465 billion.
And corporate tax revenue surged to almost $372 billion, topping the previous high reached in fiscal 2007. Officials attributed the overall revenue gains to increases in business and personal income from a rebounding economy, pandemic relief and the vaccination rollout.
Federal spending grew to a whopping $6.8 trillion in fiscal 2021, a 4.1 percent increase from the previous year’s level. But that total was still $431 billion below the White House budget forecast, partly because of delays in spending pandemic relief money.
Total federal borrowing from the public increased by less than the amount of the deficit because Treasury drew down its huge cash balance built up in the pandemic's early days. As a result, debt increased by $1.3 trillion last year, down from $4.2 trillion in fiscal 2020, when Treasury sold huge amounts of short-term debt to finance pandemic relief and grow its cash stockpile to cover emergencies.
As a share of the economy, borrowing from the public fell slightly from 100.3 percent of gross domestic product at the end of fiscal 2020 to 99.5 percent last year.
The Treasury’s official calculation of the fiscal 2021 deficit was in line with the Congressional Budget Office’s Oct. 8 estimate. In July, the CBO estimated that the deficit would be $3 trillion; the White House in August updated its February forecast, predicting a $3.1 trillion shortfall.
For the current fiscal year, the White House budget office estimates that the deficit will drop to $1.5 trillion, a little higher than the CBO’s $1.15 trillion forecast, as pandemic relief fades. Both projections show deficits declining through mid-decade before starting to rise again because of growing costs of health care programs and benefits for seniors as well as interest payments on the debt.
The baseline projections don’t take into account changes in the economic situation or new legislation that’s working its way through Congress.
The latter includes a bipartisan infrastructure bill that’s estimated to add $256 billion to deficits over the next decade and a budget reconciliation bill that’s still being negotiated. That measure is expected to add tax cuts and new spending totaling no more than $2 trillion; top Democrats say it’ll be fully paid for, but it’s not yet clear what “score” the CBO will give the still-unfinished legislation.