Observations show increases in river discharge to the Arctic Ocean especially in winter over the last decades but the physical mechanisms driving these changes are not yet fully understood. We hypothesize that even in the absence of a precipitation increase, permafrost degradation alone can lead to increased annual river runoff. To test this hypothesis we perform 12 millennium-long simulations over an idealized hypothetical watershed (1 km2) using a distributed, physically based water balance model (Water flow and Balance Simulation Model, WaSiM). The model is forced by both a hypothetical warming defined by an air temperature increase of 7.5 ∘C over 100 years, and a corresponding cooling scenario. To assess model sensitivity we vary soil saturated hydraulic conductivity and lateral subsurface flow configuration. Under the warming scenario, changes in subsurface water transport due to ground temperature changes result in a 7%–14% increase in annual runoff accompanied by a 6%–20% decrease in evapotranspiration. The increase in runoff is most pronounced in winter. Hence, the simulations demonstrate that changes in permafrost characteristics due to climate warming and associated changes in evapotranspiration provide a plausible mechanism for the observed runoff increases in Arctic watersheds. In addition, our experiments show that when lateral subsurface moisture transport is not included, as commonly done in global-scale Earth System Models, the equilibrium water balance in response to the warming or cooling is similar to the water balance in simulations where lateral subsurface transport is included. However, the transient changes in water balance components prior to reaching equilibrium differ greatly between the two. For example, for high saturated hydraulic conductivity only when lateral subsurface transport is considered, a period of decreased runoff occurs immediately after the warming. This period is characterized by a positive change in soil moisture storage caused by the soil moisture deficit developed during prior cooling.