By Kate Davidson
WASHINGTON -- The U.S. government ran its largest budget deficit
in six years during the fiscal year that ended last month, an
unusual development in a fast-growing economy and a sign that -- so
far at least -- tax cuts have restrained government revenue
gains.
The deficit totaled $779 billion in the fiscal year that ended
Sept. 30, up 17% from $666 billion in fiscal 2017, the Treasury
Department said Monday. The deficit is headed toward $1 trillion in
the current fiscal year, the White House and Congressional Budget
Office said.
Deficits usually shrink during economic booms because strong
growth leads to increased tax revenue as household income,
corporate profits and capital gains all rise. Meantime, spending on
safety-net programs like unemployment insurance and food stamps
tends to be restrained.
In the last fiscal year, a different set of forces was at play
as economic growth sped up. Interest payments on the federal debt
and military spending rose rapidly, while tax revenue failed to
keep pace as the Republican tax cuts for both individuals and
corporations kicked in.
"The deficit is absolutely higher than anyone would like," Kevin
Hassett, chairman of the Council of Economic Advisers, said last
week. He said the administration's budget for next fiscal year will
take "a much more aggressive stance" on curbing federal
spending.
Democrats blamed the tax cuts for the growing deficit.
"A deficit of this magnitude in an economy this strong is
historically unprecedented," said Jason Furman, chairman of the
Council of Economic Advisers in the Democratic administration of
President Obama and an economic policy professor at Harvard
University.
"Undertaking permanent fiscal stimulus [through tax cuts] at
this stage of the economic expansion is contrary to all sound
tenets of economic policy," he said, adding that stagnant
government revenue was proof that tax cuts don't pay for
themselves, as Republicans have argued.
Higher government spending and near-flat revenue combined to
drive the fiscal 2018 deficit to 3.9% of gross domestic product, up
from 3.5% of GDP the year before.
By comparison, the last time the jobless rate was below 4%, in
2000, the U.S. ran a budget surplus of 2.3% of GDP. Revenue that
year rose 11% from a year earlier. And in 1969, when the jobless
rate last touched 3.7%, the U.S. ran a budget surplus equal to 0.3%
of GDP. Revenue was up 22% that year.
Annual economic output grew 5.4% between the second quarter of
2017 and the second quarter of 2018, not adjusted for inflation.
Government revenue for the fiscal year rose 0.4% to $3.3 trillion
through September, also not adjusted for inflation.
The 2018 fiscal-year results include three months -- October,
November and December -- before the new tax law took effect, likely
providing a boost to the overall revenue picture.
Trump administration officials said that the tax cuts are
driving faster economic growth, which will eventually lead to big
increases in tax revenue.
Last fiscal year, income taxes withheld for individuals rose 1%
but corporate tax receipts fell 31% -- both reflecting the broad
tax overhaul enacted in December. Individual rates were reduced by
varying amounts across income thresholds while the corporate tax
rate was slashed to 21% from 35%.
In addition to the lower tax rate, companies became able to
immediately deduct the full value of equipment purchases rather
than spreading it over several years. In February, employers began
using new withholding tables, reducing the share of income withheld
from workers' paychecks to reflect the lower tax rates and expanded
standard deduction and child tax credit.
At the same time, government spending rose 3% last year, to $4.1
trillion. Rising interest rates and the amount of total debt
outstanding drove up federal interest costs 14% last year from
fiscal 2017, or $65 billion. Mr. Trump has complained that Federal
Reserve interest rate increases are driving up government
costs.
Spending on military programs also rose last year by 6%, or $32
billion, while Social Security costs climbed 4%, or $39
billion.
Government spending as a share of GDP declined, but federal
revenue fell even more -- to 16.5% of GDP last year from 17.2% in
the previous year -- pushing the deficit higher.
Administration officials said Monday the year-end deficit figure
is smaller than they had projected earlier this year. They also
said it would take some time for the benefits of tax cuts to filter
into the budget and boost revenue.
White House budget director Mick Mulvaney said Monday the
growing economy was "an important step toward long-term fiscal
sustainability."
"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," he said.
Costs associated with an aging population, including higher
Social Security and Medicare spending, are expected to continue
pushing up deficits over the coming decades. That could constrain
the government's ability to respond to future recessions or other
crises.
To restrain deficit growth, the president's last two budgets
called for trillions of dollars in cuts to programs including food
stamps, disability benefits, welfare and student loans.
Rep. Nancy Pelosi of California, the Democratic leader,
criticized those efforts. "Republicans have exposed their true
agenda in budget after budget: add trillions to the deficit, and
then use those deficits to justify slashing the Medicare, Medicaid
and Social Security that seniors and families rely on," she
said.
Write to Kate Davidson at kate.davidson@wsj.com
(END) Dow Jones Newswires
October 15, 2018 19:47 ET (23:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.