Improving economy may help U.S. deficit

WASHINGTON — The government reported Wednesday that the U.S. budget deficit widened in May by $139 billion. But the annual deficit stayed on track to finish below $1 trillion for the first time since 2008.

Steady economic growth and higher tax rates have boosted the government's tax revenue. With the May increase, the deficit through the first eight months of this budget year totaled $626 billion, according to the Treasury. That's down $218 billion lower than the same period last year.

The Congressional Budget Office estimates the deficit won't grow much before the budget year ends on Sept. 30. It forecasts an annual deficit of $642 billion. If correct, that would be well below last year's deficit of $1.09 trillion and the lowest in five years. It would still be the fifth-largest deficit in U.S. history.

The federal deficit represents the annual difference between the government's spending and the tax revenues it takes in. Each deficit contributes to the national debt, which recently topped $16 trillion. At the same time, a smaller deficit has taken pressure off of negotiations to raise the federal borrowing limit.

So far this budget year, revenue has risen 15 percent to $1.8 trillion. The government is taking in more money because of higher rates that went into effect on Jan. 1. Modest economic growth has also boosted tax revenue.

And this month the government is expecting large dividend payments from Fannie Mae and Freddie Mac, which will keep the deficit from growing. Fannie is expected to pay $59.4 billion; Freddie is expected pay $7 billion. The mortgage giants are profitable again and are paying dividends to the government in return for the loans they received during the financial crisis.

While revenue has increased greatly, spending has only risen 0.8 percent this year to $2.43 billion.

Military spending has dropped 4.3 percent, reflecting the winding down of the wars in Iraq and Afghanistan. Spending on unemployment benefits, which had swelled as millions lost their jobs during the Great Recession, fell 25.3 percent compared with the same period a year ago.

Across-the-board government spending cuts that began on March 1 are expected to lower spending further in the remaining months of this budget year.

The deficit reached a record $1.41 trillion in budget year 2009, which began four months before President Barack Obama took office. That deficit was largely because of the worst recession since the Great Depression. Tax revenue plummeted, while the government spent more on stimulus programs.

The budget gaps in 2010 and 2011 were slightly lower than the 2009 deficit as a gradually strengthening economy generated more tax revenue.

President George W. Bush also ran annual deficits through most of his two terms in office after he won approval for broad tax cuts and launched wars in Afghanistan and Iraq.

The last time the government ran an annual surplus was in 2001.

AP-WF-06-12-13 2147GMT


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