By Kate Davidson 

WASHINGTON--The federal deficit widened last year amid higher government spending -- including rising interest costs on the debt and increased funding for the military -- and flat revenues following last year's tax cut.

The government ran a $779 billion deficit in the fiscal year that ended Sept. 30, the Treasury Department said Monday. That is the largest annual deficit in six years and 17% higher than the $666 billion deficit in fiscal 2017. As a share of gross domestic product, the deficit totaled 3.9%, up from 3.5% a year earlier and the third consecutive increase.

The deficit would have been even higher if not for shifts in the timing of certain payments, Treasury said.

Government receipts held steady at $3.3 trillion, despite strong economic growth and a robust labor market. The low unemployment rate, which hit 3.7% in September, coupled with rising wages would typically drive government tax revenue higher.

But individual withheld income taxes rose just 1% in fiscal 2018, and corporate tax receipts declined 22% -- both reflecting changes implemented as part of the sweeping tax overhaul enacted in December, a senior Treasury official said.

Trump administration officials had argued last year the new tax law would generate enough economic growth to offset the costs of a tax cut. Treasury Secretary Steven Mnuchin went further, at times saying the changes would actually help reduce the deficit. Monday's report showed that, so far, that is not happening.

More broadly, declining government revenues and long-term costs associated with an aging population, including higher Social Security and Medicare spending, are expected to continue pushing up deficits over the coming decades.

White House budget director Mick Mulvaney said Monday the growing economy will create increased government revenues, "an important step toward long-term fiscal sustainability," he said.

"Going forward, President Trump and this administration will continue to work with Congress to make the difficult choices needed to bring fiscal restraint, which, when matched with increasing revenue, will reduce our deficit," Mr. Mulvaney said.

After the tax law was enacted last year, companies became able to take advantage of a new, lower corporate tax rate and immediately deduct the full value of equipment purchases -- changes that weighed on corporate tax receipts, the senior Treasury official said. Starting in February, employers started using new withholding tables under the law, reducing the share of income withheld from workers' paychecks.

At the same time, government spending rose 3% last year, to $4.1 trillion. Increases in interest rates and the amount of total debt outstanding drove up interest costs 14% last year from fiscal 2017, or $65 billion. Spending on defense military programs also increased 6%, or $32 billion, and Social Security costs rose 4%, or $39 billion.

Mr. Mnuchin on Monday defended Mr. Trump's push to increase military spending last year, culminating in a congressional budget agreement that would increase government spending by almost $300 billion over two years above limits set in a 2011 law.

(END) Dow Jones Newswires

October 15, 2018 14:18 ET (18:18 GMT)

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