For months, the nation's finances have been staggering two steps forward, one step back. November brought a modest step back as higher spending pushed the budget deficit to a worse-than-expected $150.4 billion, the U.S. Treasury Department announced Friday.
That's a jump of 25% from the same month a year ago, when the deficit totaled $120.3 billion, an increase of 7% from the deficit in October and also higher than the $140 billion that a Bloomberg survey of analysts had forecast.
But it's not as bad as it looks at first glance: As economists are quick to point out, a top-line comparison of this November's budget to that of November 2009 doesn't tell the entire story. Last year, a shift in payments for Social Security and Medicare, among other programs, to Oct. 30, 2009 from Nov. 1, 2009, which fell on a Sunday, artificially lowered November 2009's spending, making November 2010 look worse by comparison.
The primary culprit of the worse-than-expected deficit was increased government spending, which surged 17.9% to $299.4 billion for the month, outpacing substantial revenue growth.
In November, revenue rose 11.5% to $148.96 billion, marking a reversal in the revenue growth rate, which had slowed for three consecutive months. Year-over-year government revenue increased only 7.9% in October. Still, the accelerating revenue growth represents a potential long-term 'ray of light' in the short-term darkness of the November report.
Further, November's strong rebound to an 11.5% growth rate -- although economists are careful to point out that one month is not nearly long enough to conclude a trend -- is consistent with the stronger U.S. GDP growth that the economy recorded in the third quarter and that probably continued in to the fourth quarter.
The Congressional Budget Office has forecast a $1.067 trillion deficit for the current year, fiscal 2011, or about 7% of U.S. gross domestic product. The U.S. government posted a $1.29 trillion deficit for fiscal 2010, a record $1.42 trillion deficit in fiscal 2009, and a $454.8 billion deficit in fiscal 2008.
Little Impact on Markets
November's budget deficit data had little impact Friday on the market for U.S. Treasuries, at least initially, with the 10-year note virtually unchanged at 3.28%.
That 10-year rate is still comparatively low, even after growing more than a half point in the past two months, indicating that institutional investors -- from pension funds to foreign governments -- remain confident that the world's largest economy will be able to service its high national debt.
U.S. stock markets were also unmoved by the November data, at least initially, with the Dow Jones Industrial Average up approximately 30 points to 11,401 -- essentially flat from where it was before the report's release.
November Report: Some Qualified Good News
At its core, November's budget report represents qualified good news: the larger increase in year-over-year revenue compared to October reflects a U.S. economy that saw revved-up third-quarter growth after a second-quarter slowdown. And faster GDP growth is just what the U.S. needs in the quarters and years ahead to create more jobs and begin to chip away at the nation's large job deficit of more than 15 million jobs.
Further, if the trend of stronger U.S. GDP growth continues and the U.S. economic expansion progresses, that will also make policymakers' task of balancing the budget easier. All other factors being equal, it's easier to balance a budget during a period of rising revenue in an economic expansion than during a time of shrinking revenue in a recession.
However, the good news is qualified because while the stronger revenue growth will help cut the deficit, it's unlikely to be enough to balance the budget -- assuming the U.S. economy doesn't expand at hyper growth rates of more than 8% per year. The reason? Entitlement spending -- including outlays for Social Security and Medicare, as Baby Boom citizens retire -- is set to start pushing the deficit back up again in 2015.
Given that demographic reality, balancing the budget after 2015 will most likely require entitlement reform, other program cuts and some type of tax increase or new revenue stream, such as a value-added tax.