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Federal deficit higher in July, $1.27T this year

WASHINGTON — The federal deficit climbed higher into record territory in July, hitting $1.27 trillion with two months remaining in the budget year.

The Treasury Department said Wednesday that the July deficit totaled $180.7 billion, slightly more than the $177.5 billion economists had expected.

The Obama administration is projecting that when the current budget year ends on Sept. 30, the imbalance will total $1.84 trillion, more than four times last year's record-high.

The soaring deficits have raised worries among foreign owners of U.S. Treasury securities including the Chinese, the largest holder of such debt.

Massive amounts of government spending to combat the recession and stabilize the U.S. financial system have pushed the deficit higher. The cost of wars in Iraq and Afghanistan, along with depleted government tax revenues, also are major factors.

The July deficit reflected government spending of $332.2 billion, a record amount for any month and up from outlays of $263.3 billion in July 2008. Of that increase, about $25 billion reflected the fact that Aug. 1 was a Saturday this year, requiring many government benefit checks to be sent out earlier and counted as spending in July.

Government receipts totaled $151.5 billion, down 5.6 percent from a year ago. It marked the 15th consecutive month that government receipts have been lower than the same month in the prior year, illustrating how deep the recession has cut into tax receipts.

Through the first 10 months of the budget year, receipts total $1.74 trillion, down 16.9 percent from the same period in 2008.

Outlays totaled $3 trillion over the past 10 months, up 21.1 percent from the same period in 2008. The resulting deficit of $1.27 trillion compares to an imbalance of $388.6 billion during the year-ago period. The deficit for all of 2008 was $454.8 billion, the current record holder in dollar terms.

President Barack Obama's economic team sought to reassure the Chinese during high-level talks last month that the administration is committed to reducing the deficits once the current economic and financial crises have been resolved.

So far, interest rates have remained low as the Federal Reserve has kept the federal funds rate, a key short-term interest rate at a record low near zero in an effort to jump-start the economy. At the end of a two-day meeting Wednesday, Fed officials repeated their view that the weak economy was likely to "to warrant exceptionally low levels of the federal funds rate for an extended period."

The concern, however, is that rates could begin rising despite the Fed's efforts if foreigners suddenly lose confidence in the government's ability to manage its debt burden.

In bond markets, prices fell Wednesday after a fairly weak auction of $23 billion in 10-year Treasury notes. The Treasury Department is auctioning a record $75 billion in debt this week.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.75 percent from 3.70 percent ahead of the auction results and 3.67 percent late Tuesday. Bond prices jumped Tuesday as stocks fell.

Investors will track demand because a drop in buyers could force the government to increase its payout. The resulting rise in rates would raise borrowing costs for the government as well as consumers and businesses, and could end up slowing the economy.

The total public debt now stands at $11.6 trillion. Interest payments on the debt cost $452 billion last year, the largest federal spending category after Medicare-Medicaid, Social Security and defense.