2010 Budget Deficit Comes in Below Expectations -- but Still Second-Highest Ever

The federal government on Friday posted a smaller-than-expected $1.29 trillion budget deficit for fiscal 2010, which ended Sept. 30 -- more evidence that the U.S. economy continues to inch back toward health. It was, however, still the second-highest deficit on record, behind the $1.42 trillion posted in fiscal 2009.

The government posted a $34.49 billion deficit in September, the last month of fiscal 2010, slightly higher than the $32 billion Bloomberg survey consensus estimate. The federal government reported a $45.2 billion deficit in September 2009.

Annual federal spending fell by 1.6% to $3.46 trillion -- but investors should keep in mind that outlays in 2009 were boosted by the TARP and fiscal stimulus package.

More significantly, fiscal 2010 revenue increased 2.7% to $2.16 trillion -- and the increase, although small, provides more evidence that the U.S. economy continues to recover. Historically, government revenue from income taxes and corporate taxes has tended to increase during periods of economic expansion, as more Americans find jobs and corporate revenues rise.

Markets Yawned at Report

The release of September's budget deficit data Friday had little impact on the market for U.S. Treasuries, with the 10-year note virtually unchanged at 2.58%. The low rate indicates that despite its high national debt, institutional investors -- from pension funds to foreign governments -- remain confident in world's largest economy's ability to service its debts.

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U.S. stock markets likewise showed little reaction to the announcement, at least initially. The Dow Jones Industrial Average, down about 45 points before the announcement, traded down about 40 points to 11,051 in the initial minutes after the data' s release.

Back in July, the Obama administration had forecast a record $1.47 trillion deficit for fiscal 2010. The Congressional Budget Office's forecast was for a $1.34 trillion deficit for fiscal 2010, and it has projected a $1.07 trillion deficit for fiscal 2011. The federal government also posted a $454.8 billion deficit in fiscal 2008.

There was one small shadow on September's otherwise positive statistics: Revenue for the month rose 12% to $245.2 billion from $218.9 billion a year earlier -- a substantial increase, but slightly lower than the 12.7% year-over-year revenue increase recorded in August. Should that pattern continue, it could be a reflection of the U.S. economic recovery losing steam.

However, economists and budget analysts are quick to point out that two months worth of data is not enough to conclude that a revenue trend has formed.

Small Steady Improvements

Government spending rose 10.1% in September to $279.7 billion from $254.1 billion a year earlier. Economists expect the growth in federal spending to slow this year, as outlays for TARP and related financial system support programs, and for fiscal stimulus, declines.

Taken together, the September and fiscal 2010 deficit report continues to reflect a modestly improving budget picture -- one that confirms a slowly recovering U.S. economy. Growth in international sales has boosted revenue and earnings for many U.S. corporations, increasing their tax payments to the U.S. Treasury.

Provided that trend continues and the U.S. economic expansion picks up speed with sustained job growth, policy makers will find the task of crafting the next budget a bit less difficult because, all other factors being equal, it's easier to balance a budget during a period of rising revenue than during the opposite.