US Finances: January
Through January of the 2025 US fiscal year —
Where do US federal finances stand?
Although the Biden Administration was in office for only two-thirds of January, the month’s financial results largely reflect the final fiscal outcomes of the previous administration. Going forward, the financial impact of the Trump Administration will become clearer.
For now, let’s summarize where things stand through January.
Revenue Increase
Although revenue had been declining through December, total revenue as of January has risen slightly by 1%. While a modest increase, it remains noteworthy. The Congressional Budget Office (CBO) points out that an extension of FY 2023 required tax payments pushed some collections into FY 2024, suggesting that last year’s revenue level was inflated. That, in turn, means FY 2025 revenue (because it is trending higher than FY 2024) is doing better than it appears.
The strength of the current economy likely plays a significant role. Indeed, revenue from worker paycheck withholding is up $61 billion (+5%) over last year’s pace according to CBO. Excise taxes are up +22% over last year’s pace, and customs duties are up by +13%. CBO does suggest, however, that the customs duties increase may be due to additional purchasing in anticipation of increased tariff rates of the Trump Administration.
One big trend to watch: corporate tax revenue is down -21% from FY 2024, partly due to a shift in collections from FY 2023 into FY 2024, which artificially inflated last year’s revenue by approximately $35 billion. Right now, collections are down by the same $35 billion amount.
Spending Increases
While spending is trending up significantly over last year’s pace by +15%, CBO notes that about half of that increase is due to timing shifts in spending. After accounting for these shifts, the increase falls to approximately +7%, similar to the revised +6% pace through December.
Still, CBO reports that credits from banking cleanups by the Federal Deposit Insurance Corporation (FDIC) reduced federal outlays by -$68 billion. Excluding the credits, the spending increase trend would climb back to about 11% over last year’s pace.
Factoring out spending timing and FDIC credits, there is still an upward trend in spending due primarily to:
Medicare, Medicaid, Veterans' Benefits, and Social Security (+8%): Higher federal spending likely reflects a combination of demographic shifts, inflation adjustments, and recent legislative changes, such as expanded veterans’ benefits.
Interest on US public debt (+13%): With federal debt surpassing $36 trillion, interest payments have risen significantly. Net debt interest cost is up 13% over last year’s pace (+$37 billion).
Environmental Protection Agency (+550%): The EPA has outpaced last year’s spending by +$22 billion primarily due to new clean energy grants, according to CBO.
Other significant spending increases include: +$24 billion for Department of Defense operations and maintenance, +$12 billion—primarily for hurricane disaster response within FEMA—and +$11 billion for refundable healthcare tax credits due to higher enrollment under the Affordable Care Act.
Budget Deficit Growth
The federal budget deficit is growing substantially compared to last year. Through January, the annual deficit stood at $838 billion which is a staggering +58% increase over the same period last year.
However, adjusting for timing shifts in revenue and spending offers a more complete—and less alarming—perspective. According to CBO, removing spending timing distortions reduces the deficit to approximately $750 billion—an increase of $146 billion or +24% over last year’s pace. Still, that’s a big increase.
Near-term Outlook
The next several months could provide a clearer picture of fiscal trends. Two competing trends are emerging.
On the one hand, spending could decline due to the Trump Administration’s aggressive efforts to reign in spending. The DOGE and other elements of the Trump Administration, have taken actions to slow or stop spending, particularly spending on both new- and previously-awarded discretionary grants. Significant federal workforce reductions underway may also affect spending trends, though more likely no earlier than the spring and summer of 2025.
On the other hand, spending could grow due to:
Inflationary Adjustments: Increases to benefits and other indexed spending categories.
New disaster supplemental: Congress enacted a substantial $117 billion (discretionary) funding supplemental this past December, mostly for disaster-related costs. Much of that funding likely has not yet been released.
Southern California wildfire relief: The scale and timing of federal aid remain uncertain.
Border security and defense priorities: Both the Trump Administration and Congress have indicated a desire to spend more on border security and national defense starting this year, though given the time it takes to actually execute increased spending in these areas, any impact on spending trends may not actually show up during FY 2025.
It remains to be seen how these competing forces will shape fiscal trends. For now, it’s important to remain cognizant of the unique timing and situational factors driving current fiscal outcomes.
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