U.S. Budget Deficit Widened 454% in March -- 5th Update

By John McCormick

The U.S. budget deficit grew to a record $1.7 trillion in the first half of the fiscal year as a third round of stimulus payments sent federal spending soaring last month.

The budget gap, broadened by the Covid-19 pandemic and related shutdowns that sent the economy into a tailspin starting in March 2020, is now more than double what it was for the same period a year ago, the Treasury Department said Monday.

The deficit was $660 billion last month, 454% wider than it was in the same month a year ago. Revenue rose 13% to $268 billion, while spending increased 161% to $927 billion -- the third-highest total on record, after June and April of last year.

The government's spending surge has provided some cushion to the economy from the pandemic's devastation, but it has also sent the federal debt soaring to levels not seen since the end of World War II as a proportion of the economy. Weaker corporate-tax revenue has contributed to the budget shortfall.

"While much of the borrowing of the past year was unquestionably warranted, we are now becoming dangerously numb to the trillions in debt that are piling up," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "We need to start paying for what we spend. We need a plan to bring down the debt."

Others said the magnitude of the economic challenges the nation has faced during the past year warrant more spending. And White House officials and some economists have argued that lower debt-servicing costs make it more affordable for Congress to borrow more now to shield the U.S. economy from the impact of the pandemic.

"The increase in the deficit since before the pandemic is hard to wrap one's head around," said Wendy Edelberg, a former Congressional Budget Office chief economist who in June became director of the Hamilton Project, a think tank affiliated with the Brookings Institution.

"But we have to understand those numbers in the context of the crisis we are living through," she said. "The pandemic has led to a temporary loss of more than 10 million jobs. The robust fiscal response has made me more optimistic about our economic future."

Despite a $4 trillion expansion in debt last year, a 25% increase, interest payments on that debt declined 8%. The yield on the 10-year Treasury note fell as low as 0.52% last summer, and at roughly 1.67% on Monday it remains far below its average in recent years.

Budget deficits are likely to remain at the center of debates over the Biden administration's next major legislative effort: a $2.3 trillion proposal that aims to bolster long-term economic growth through investments in infrastructure, clean energy and education.

A bipartisan group of lawmakers met with President Biden on Monday about his infrastructure plan, as Republicans and Democrats seek to determine whether they can reach an agreement on such a package's size, scope and funding.

Republicans have criticized several aspects of the plan, including proposed tax increases on corporations and the broad scope of the spending. Some GOP lawmakers have instead pushed for the White House to advance a much narrower infrastructure bill.

Federal debt has been marching upward ever since the fiscal crisis at the end of George W. Bush's administration and the start of Barack Obama's presidential tenure. Former President Donald Trump also ushered in spending programs and tax cuts that widened the gap sharply even before the coronavirus crisis.

Higher costs for unemployment benefits, nutrition assistance, healthcare and assistance to small businesses pushed government spending higher in March, while stronger corporate-tax collection and remittances from the Federal Reserve lifted revenue, Treasury officials said.

Outlays from October through March rose to $3.4 trillion, an increase of 45%. Receipts rose 6% to $1.7 trillion.

The budget gap is on track to widen further, following enactment of a $1.9 trillion aid package passed last month with only Democratic votes that provided another round of stimulus checks for many Americans, extended enhanced jobless benefits and provided billions of dollars for vaccine distribution and school reopenings.

The Congressional Budget Office projects the deficit for the fiscal year ending Sept. 30 will total $2.3 trillion, almost $1 trillion less than last year's record gap but more than officials projected in September.

Even before the latest aid package was passed, the CBO projected that federal debt would equal 102% of gross domestic product in 2021. It has exceeded that level only twice before in U.S. history, in 1945 and 1946, after a surge in federal spending as a result of World War II.

The CBO has projected that the federal debt will almost double from here to 202% of GDP by 2051, reflecting rising costs for healthcare and debt service.

Budget deficits will widen to 13.3% of GDP in 2051, from 5.7% in 2031, the CBO said, driven largely by increasing costs of servicing the debt.

Treasury officials said Fed remittances sent to the government have increased 33% so far this fiscal year compared with last year, as lower interest rates have held down the central bank's costs and its growing portfolio of securities has yielded greater income.

Write to John McCormick at [e-mail]

(END) Dow Jones Newswires

04-12-21 1936ET