Budget Deficit Widens as Fiscal Cliff Looms

(Corrects John Boehner’s title in 13th paragraph of story published Nov. 13.)

The U.S. government’s budget deficit widened in October, the first month of the new fiscal year, as President Barack Obama and Congress seek an agreement to lower future gaps and avoid the so-called fiscal cliff.

The deficit expanded 22 percent to $120 billion from a $98.5 billion shortfall in October 2011, the Treasury Department said today in Washington. The gap exceeded the $113 billion median estimate in a Bloomberg survey of economists.

“The October miss from forecast was small relative to annual figures and the uncertainty with the fiscal cliff debate,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. Outlays for defense were more than expected in October, which could be due to a “spend before the cliff effect,” he said.

Obama has invited leaders in Congress for talks on a deal to reduce budget deficits that would avert the $607 billion in automatic spending cuts and tax increases slated to take effect Jan. 1. The Congressional Budget Office has forecast that the fiscal cliff would push the economy into a recession next year.

The wider October deficit was due to a shift in payment dates in the same month in 2011, which led to lower outlays in the year-ago period, the Treasury said. Lower corporate taxes also contributed to the expanded deficit last month.

Photographer: Andrew Harrer/Bloomberg

The deficits add to national debt, which will most likely hit the $16.4 trillion limit at the end of December, with extraordinary measures enabling the U.S. to meet its obligations “until early in 2013,” the Treasury Department said on Oct. 31. Close

The deficits add to national debt, which will most likely hit the $16.4 trillion limit... Read More

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Photographer: Andrew Harrer/Bloomberg

The deficits add to national debt, which will most likely hit the $16.4 trillion limit at the end of December, with extraordinary measures enabling the U.S. to meet its obligations “until early in 2013,” the Treasury Department said on Oct. 31.

“We still have fiscal policy run amok,” Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, said before the report was released. “We need to implement the fiscal policy that lowers the growth trajectory of outlays and raises the growth trajectory of revenues.”

Automatic Reduction

The automatic reduction in spending including defense, paired with increases in tax rates including those on income, capital gains and dividends, would probably boost the unemployment rate to 9.1 percent in the fourth quarter of 2013, the nonpartisan CBO projected.

“By the end of this year I think at best they can agree to put things off for six months,” Martin Feldstein, a professor of economics at Harvard University, said in an interview on Bloomberg Television on Nov. 8. “There isn’t enough time, but there is time to put something in place that’s better than the fiscal cliff.”

Today’s report showed revenue increased 13 percent in October to $184.3 billion, compared with $163.1 billion in the same month a year earlier. Spending jumped 16.4 percent to $304.3 billion from $261.5 billion, the Treasury said.

Individual income tax receipts in October rose to $102 billion from $86.7 billion in the same period last year. Corporate income tax receipts fell to $1.62 billion from $2.47 billion.

Budget Gap

Estimates of the October budget gap in the Bloomberg survey of 29 economists ranged from $129 billion to $110 billion.

Absent the automatic spending cuts and most of the tax increases currently set to take effect next year, the deficit would grow to $1.04 trillion in fiscal year 2013, the fifth consecutive year of budget gaps exceeding $1 trillion, according to the CBO. The budget deficit was $1.09 trillion in fiscal 2012, the fourth-largest since World War II.

Obama, who plans to reduce the shortfalls by increasing taxes for top earners, is holding meetings with labor and business leaders in the White House this week. The talks are intended to shore up the support for his plan before Nov. 16 discussions with Republican House Speaker John Boehner, Senate Minority Leader Mitch McConnell, Democrat House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid.

Obama Election

While Obama said Nov. 6 elections showed voters back his proposal, Boehner cited public support for the re-elected House Republican majority and said that tax rates must not go up. Both sides have left room for a compromise that would curtail tax breaks to pay for preserving current rates.

The deficits add to national debt, which will most likely hit the $16.4 trillion limit at the end of December, with extraordinary measures enabling the U.S. to meet its obligations “until early in 2013,” the Treasury Department said on Oct. 31.

“There’s a question of whether the debt ceiling is going to be wrapped up into the fiscal cliff discussions or not,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, said before today’s Treasury release. “If it’s not, then we’re going to have to have a whole another round of negotiations very early next year to get the debt limit increased.”

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net; Meera Louis in Washington at mlouis1@bloomberg.net

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

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