US budget deficit hits record $1 trillion
Economists surveyed by Bloomberg News had expected the June deficit to total $97.0 billion.The budget deficit totaled $189.7 billion in May. A year ago, in June 2008, the government posted a $33.5 billion surplus.
In June, revenue, (formally known as receipts), increased 17 percent to $215.4 billion, while spending (outlays) increased 37 percent to $309.7 billion, Bloomberg News reported Monday.
Stimulus, bank bailout boost deficit
The Obama administration expects this year's budget deficit to total a record $1.84 trillion – boosted higher by the banking bailout to stabilize the financial system and the fiscal stimulus package to jump-start the U.S. economy. The administration forecasts a $1.26 trillion for next year, fiscal year 2010, which begins October 1, 2009. Last year, fiscal year 2008, the U.S. government posted a then-record $454.8 billion deficit.
Richard Yamarone, director of economic research for Argus Research Group in New York, said the factors behind this year's large budget deficit aren't rocket science.
"When you have soaring costs in battling the economic crisis and bailing out corporations amid escalating unemployment and a rapidly eroding tax base, you get ballooning deficits," Yamarone told Bloomberg News Monday.
Further, major U.S. think tanks offered decidedly different interpretations of the nation's fiscal status, and how to decrease the deficit.
The Heritage Foundation, a conservative think tank, argued that the recession only magnifies a serious structural deficit created by large commitments to entitlement programs, such as Medicare, Medicaid, and Social Security. "Solving America's deficit problem is an impossible task unless entitlement programs are reformed. The current recession, which has put a finer point on the problem of trillion-dollar deficits, should elevate the need for reform to a level not even Congress can continue to ignore." Heritage says the deficit can not be reduced without cuts in federal spending for these entitlement programs.
Conversely, the Economic Policy Institute, a liberal think tank, argues that Congress should not be thinking in terms of deficit reduction right now, but toward efforts to further stimulate the U.S. economy. "Public investment and direct government spending works better than tax rebates for stimulating the economy. Stimulus spending already in the pipeline will generate jobs and prevent unemployment from reaching the 12% level that it might have reached without the stimulus." What's more, the EPI favors a second stimulus package; however, President Obama has said he will give the first stimulus package more time to work before making a decision on a potential second stimulus package.
Fiscal/Economic Analysis: An in-line June budget deficit report – and one that U.S. stock and bond markets had already factored-in, or discounted, basically.
Moving forward, the key category to watch is federal revenue. Spending will decline as we get past the irregular stimulus package spending period. Revenue, however, needs to show monthly increases of 3-5 percent in the months and quarters ahead. If it doesn't, that would indicate the economic recovery for Q3/Q4 has not started – a major trouble sign for both earnings growth and job creation, and by extension, for the U.S. stock market.
Further, long-term, Congress' goal should be a balanced budget, via both cutting spending and raising taxes to achieve that objective, with entitlement reform on the table, as well. The short-term goal: reducing the budget deficit to 3 percent of GDP, down from this year's projected 12.9 percent of GDP.