Budget deficit rose to $176 billion in October, worse than predicted

u-s-budget-deficit-rose-to-176-billion-in-october-worse-thanIn a disappointing start to the federal government's new fiscal year, the nation posted a higher-than-expected $176.4 billion budget deficit for October, the Treasury Department announced Thursday, as bank bailout and stimulus spending kept outlays at a high level, while the recession decreased receipts.

Economists surveyed by Bloomberg News had expected the federal government to post a $150.0 billion deficit for October. The U.S. government posted a $46.6 billion deficit in September to close out FY2009 with a $1.42 trillion deficit – a fiscal year record. The nation's deficit in FY2008 was $454.8 billion. The near-tripling of the deficit compared to FY2008 was mainly due to the bank bailout and the $786 billion fiscal stimulus package.
In October, tax receipts plunged 17.6% to $135.3 billion, compared to $164.8 billion in October 2008, with both individual and corporate income tax receipts falling. Meanwhile, outlays decreased by 2.8% to $311.7 billion from $320.4 billion in October 2008.

The federal government last ran a surplus during FY2001 -- it took in $128 billion more than it spent during the last year of the Clinton administration.

In the first year of the George W. Bush administration, Congress passed and Bush signed a roughly $1.1 trillion tax cut, which immediately created a $150 billion structural deficit. Increased spending for the wars in Iraq and Afghanistan, for war on terror programs, and for the senior citizens' prescription drug program would subsequently increase the annual deficit to about $250 billion.

Still, despite the nation's large budget deficit, the bond market has (so far) shown few signs of holding up a stop sign regarding U.S. borrowing. The market is funding the excess borrowing needs of the U.S. government, and demand exists for U.S. debt, which lowers the interest costs on servicing the national debt.

Fiscal Analysis

This was a worse-than-expected October report -- one that displays the recession's scars. Individual income tax receipts fell to $61.2 billion from $86.3 billion in October 2008, due to the huge decrease in payrolls. Given that employment improvement lags the overall economic recovery, one should expect to see major year-over-year declines in individual tax receipts for another two to three months. At that point, the tax receipt gap should start to decline.

Bottom line: The U.S. will need to cut spending (including health care reform) and raise taxes to balance the budget over a 10-year period. There are no easy ways to achieve the goal of fiscal health.
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