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U.S. Posts Fourth-Largest Budget Deficit Since WWII

By Meera Louis and Ian Katz
October 12, 2012 6:37 PM EDT 77 Comments
U.S. Government Posts Fourth-Largest Deficit Since World War II
U.S. Government Posts Fourth-Largest Deficit Since World War II

The government budget deficit in the U.S. for the year ended in September was the fourth-largest since World War II as lawmakers debate the impact of the looming spending cuts less than a month before the election.

The shortfall registered $1.09 trillion in fiscal 2012, down from $1.3 trillion in 2011, according to Treasury Department data issued today in Washington. It reached $1.42 trillion in 2009, the highest ever. In September, the U.S. registered a surplus of $75 billion compared with a shortfall of $62.7 billion in the same month last year.

The U.S. faces a so-called fiscal cliff of $1.2 trillion in mandated spending cuts, in addition to the expiration of George W. Bush-era tax reductions, if Congress can’t agree by Dec. 31 on ways to reduce the deficit. The world’s largest economy shows signs of improvement as unemployment last month dropped to the lowest level since January 2009.

“It is encouraging that the federal deficit is shrinking, as tax revenues are rising at a mid-single digit pace and government expenditures are declining, but the deficit remains massive,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “The next President and Congress must lay out a credible deficit reduction plan that results in a falling national debt-to-GDP ratio by the end of this decade.”

‘Balanced Proposal’

President Barack Obama has “put forward a balanced proposal to further strengthen the economy and reduce the country’s future deficits,” Treasury Secretary Timothy F. Geithner said in a statement today. “It is time for Congress to act on these necessary steps that will help create sustainable economic growth for years to come.” The fiscal year deficit was the lowest since Obama took office in 2009.

Andrea Saul, a spokeswoman for Republican nominee Mitt Romney, said the budget report “highlights the big choice voters face in November.”

Obama’s “reckless spending has led to a fourth straight trillion-dollar deficit,” she said in an e-mail. “Americans deserve a president who understands that reining in our country’s out-of-control spending is not only an economic imperative -- it’s a moral imperative.”

Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York, said “it could have been worse. Revenues are picking up with the recovery and the budget deficit was closer to the $1 trillion mark than the original or the midyear estimates.”

The September surplus matched the median forecast of economists surveyed by Bloomberg.

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,428.59 at 4 p.m. in New York, after rising as much as 0.4 percent.

After Election

When lawmakers return to Washington in November for a post- election session, they will have only weeks to avert more than $500 billion in tax increases and $100 billion in automatic spending cuts set to take effect in January. A bipartisan group of eight U.S. senators is meeting this week to identify broad areas of agreement on taxes and entitlement programs, without discussion of specific numbers or targets.

The White House budget office has said the budget cuts, known as sequestration and set to start in January, would undermine economic investment and cause “severe harm” to initiatives including food-safety inspections, air-traffic control and support for schools.

“The administration strongly believes that sequestration is bad policy, and that Congress can and should take action to avoid it by passing a comprehensive and balanced deficit reduction package,” the White House budget office report said.

Credit Rating

Moody’s Investors Service said Sept. 11 that it may join Standard & Poor’s in downgrading the U.S.’s credit rating unless Congress next year reduces the percentage of debt-to-gross- domestic-product during budget negotiations.

Debt, equity and currency markets suggest the U.S. is more creditworthy than before Standard & Poor’s stripped the nation of its AAA grade last year.

Ten-year Treasury yields are down from 2.56 percent when S&P cut the U.S. one step to AA+ on Aug. 5, 2011. The yield declined one basis point to 1.66 percent today and fell to 1.379 percent on July 25, the lowest on record.

The U.S. government has attracted a record $3.17 in bids for each dollar of the $1.68 trillion of securities it has sold in 2012, according to data compiled by Bloomberg. That exceeds the previous high of $3.04 set last year.

Index Jumped

The S&P 500 Index (SPX) has jumped more than 19 percent since the rating cut.

Consumer confidence unexpectedly rose in October to the highest level since before the recession began five years ago, another report today showed. The Thomson Reuters/University of Michigan preliminary sentiment index for October increased to 83.1, the highest level since September 2007, from 78.3 the prior month. The gauge was projected to fall to 78, according to the median forecast of economists surveyed by Bloomberg News.

Today’s budget report also showed revenue rose 8.9 percent in September from the same month a year earlier, to $262 billion. Spending dropped 38 percent to $187 billion from $303 billion.

The deficit is “stuck” at around $1 trillion and “the only cure is to adjust the entitlement programs to have sustainable growth trajectories,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. “Changes in discretionary spending or tax rates can’t solve the gap given its massive size.”

Stan Collender, managing director of Qorvis Communications and a former House and Senate budget committee aide, said “a $200 billion one-year drop in the deficit is a huge change and one that at any other time in U.S. history would have been applauded.”

But with a deficit of more than $1 trillion, “no one in the administration wants to talk about the budget any more than it has to and certainly isn’t going to raise the issue itself,” said Collender, who was on a presidential budget commission during the Clinton administration.

To contact the reporters on this story: Meera Louis in Washington at mlouis1@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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