July Budget Deficit Narrowed to $165B

Aug 11th, 2010 | By businessnews | Category: Business

August 11, 2010, 2:32 PM EDT

By Vincent Del Giudice

(Updates with economist comment in fourth paragraph, trade data in fifth and markets in sixth.)

Aug. 11 (Bloomberg) — The U.S. government posted a smaller budget deficit in July compared with the same month last year, helped by a gain in corporate tax revenue as the economy recovered from the worst recession since the 1930s.

The excess of spending over revenue totaled $165 billion last month following a shortfall of $180.7 billion in July 2009, according to a Treasury Department report issued today in Washington. The gap for the fiscal year that started in October was $1.17 trillion compared with $1.27 trillion last year at the same time.

While economic growth since the middle of 2009 has helped bring in more tax revenue for the Treasury, the deficit is forecast to approach a record $1.5 trillion this year. The need to keep the budget shortfall from growing and a slowing economy plagued by joblessness close to 10 percent are challenges for the Obama administration.

“ We’re seeing pretty good profits now, it’s looking a lot more solid,” said David Wyss, chief economist at Standard & Poor’s in New York. “But, you’ve still got a $1 trillion deficit.”

Another report today showed the trade balance deteriorated in June as imports grew and exports dropped. The gap unexpectedly swelled by a record $7.9 billion to $49.9 billion, the Commerce Department reported.

Shares Drop

Stocks slumped on concern the global recovery was starting to weaken. The S&P 500 Index fell 2.5 percent to 1,093.23 at 2:26 p.m. in New York. Treasury securities climbed, sending the yield on the two-year note down to an all-time low.

The economy began to recover in the second half of 2009 from the recession that started in December 2007. A limited recovery in the labor market after the loss of 8.4 million jobs during the recession is restraining consumer spending and growth.

The world’s largest economy slowed to a 2.4 percent annual rate in the second quarter from 3.7 percent in the first three months of the year, according to Commerce Department statistics.

Fed Action

Federal Reserve policy makers yesterday said the recovery slowed more than they projected, prompting the central bank to take additional steps to support the economy.

The U.S. is financing a deficit the Obama administration projected will reach a record $1.47 trillion this year, even as yields on Treasuries have reached the lowest during an economic expansion since the Eisenhower administration in the 1950s.

The non-partisan Congressional Budget Office, in a report issued Aug. 6, projected a narrowing of the July budget deficit to $169 billion. In its estimate, the CBO said “for the sixth consecutive month, net corporate income taxes were higher than those in the same month in fiscal year 2009.” The CBO attributed it to “stronger corporate profits in 2010.”

In today’s report, the Treasury said revenue and other income climbed 2.7 percent to $155.5 billion in July from the same month last year. Corporate tax receipts increased 34 percent for the fiscal year to date to $139.7 billion. Individual income tax collections fell 4.1 percent over the same time period to $719.5 billion.

Less Spending

Spending for the entire government for July dropped 3.5 percent from the same month a year earlier to $320.6 billion. Spending by the Defense Department rose to $557 billion for the fiscal year to date. Outlays by the Social Security Administration climbed to $631.2 billion. The Department of Health and Human Services, which administers the Medicare and Medicaid programs, increased its spending to $723.4 billion.

Earlier this month, the Treasury lowered its estimate for government borrowing from July through September, reflecting a reduction in federal spending. Borrowing will total a net $350 billion in the current quarter, compared with an estimate three months ago of $376 billion, the Treasury announced Aug. 2. It also projected borrowing of $380 billion in the three months to Dec. 31.

Peter Orszag, during his last speech as White House budget director on July 28, said it would be “foolish” to try to slash the deficit before the economy recovery gains strength.

Stimulus Spending

Orszag, who left his post at the end of last month, said the measures taken in response to the worst recession in more than 70 years, including the $862 billion stimulus, helped boost U.S. economic growth and stemmed job losses.

While the government must address the nation’s long-term debt, “it would be foolish to dramatically reduce the deficit immediately” because that would choke off the recovery, Orszag said in Washington.

The economy, jobs and the budget deficit are likely to be top issues in November elections that will decide control of Congress. Heading into the campaign season, the Obama administration is facing public pessimism about the direction of the economy.

More than seven in 10 Americans say the economy is still mired in recession, and people are conflicted over how to balance concerns over joblessness and the federal budget deficit, according to a Bloomberg National Poll.

Americans are torn about whether the federal government should focus on curbing spending or creating jobs, the poll conducted July 9-12 showed. Seven of 10 Americans say reducing unemployment is the priority. At the same time, the public is skeptical of the President Barack Obama’s stimulus program and wary of more spending, with more than half saying the deficit is “dangerously out of control.”

–With reporting from Nicholas Johnston in Washington. Editors: Carlos Torres, Vince Golle

To contact the reporter on this story: Vincent Del Giudice in Washington at vdelgiudicebloomberg.net

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

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