(Bloomberg) -- The U.S. budget deficit widened to almost $1 trillion in the latest fiscal year, surging to the highest level since 2012 as President Donald Trump cut taxes and boosted spending.
The gap increased by 26% to $984 billion in the 12 months through September, representing 4.6% of gross domestic product, the Treasury Department reported Friday. The fourth straight increase confirms that the deficit under Trump is on pace to expand to historic levels.
Few economists outside the administration expect the GOP’s $1.5 trillion in tax cuts to deliver a sustainable economic boost that would narrow the gap. The deficit -- which has little precedent at these levels outside recessions or wartime -- is set to widen further as spending increases for mandatory programs and interest payments.
The ballooning gap has stirred vigorous debates over how much the government can borrow and spend without driving up interest rates or inflation. At the same time, price gains and yields remain historically low despite the expanding deficit.
For the 12-month period, spending rose 8.2%, the most since 2009, totaling $4.45 trillion on increased outlays for the military, health care and education. Revenue advanced 4% to $3.46 trillion, helped by $70.8 billion in customs duties. For September alone, the surplus was $82.8 billion, compared with $119.1 billion a year earlier.
“President Trump’s economic agenda is working," Treasury Secretary Steven Mnuchin said in a statement accompanying the release. “In order to truly put America on a sustainable financial path, we must enact proposals -- like the president’s 2020 budget plan -- to cut wasteful and irresponsible spending."
The non-partisan Congressional Budget Office has forecast that the deficit will top $1 trillion in 2020, with estimates showing a shortfall of about $1.2 trillion each year over the next decade. That would amount to nearly 5% of total gross domestic product, a measure that puts the deficit in context of the overall economy.
Election Campaign
Trump’s 2020 election bid is beginning to ramp up and he’s eager to show that his three-pronged economic agenda of tax cuts, deregulation and new trade deals have spurred growth. However, key indicators, such as business investment in equipment and machinery, have cooled lately despite incentives from tax policy. In addition, the trade tariffs are causing businesses to become hesitant with spending, while research has shown that the tax cuts are most favorable to higher-income Americans.
The president has repeatedly blamed the Federal Reserve for hampering the economy by raising interest rates too high last year and failing to cut quickly enough. The central bank is projected by economists to cut interest rates next week for the third time in three months. Officials may also telegraph that they are likely to pause for some time before making another rate move.
Fed Chairman Jerome Powell has repeatedly warned that the U.S. is on an unsustainable fiscal path. But economists are revisiting traditional ideas about how much debt can be issued, and markets don’t appear worried.
Democratic candidates seeking to challenge Trump in 2020 are pushing plans to widen access to health care and education that could cost trillions of dollars. And yields on U.S. Treasuries have fallen sharply this year to the lowest level since 2016 amid a weaker growth outlook as well as investors seeking better returns than even lower-yielding bonds from overseas.
Tariff Revenue
The deficit may have exceeded $1 trillion had it not been for the trade war with China, where Trump has escalated levies over the past year. The customs-duties revenue represented a 71% increase from 2018, as American companies paid more at the border for Chinese imports, steel and other goods. While the countries came to a preliminary agreement that’s delayed at least one planned increase in levies, current tariffs aren’t being rolled back yet.
Government outlays have provided a sizable boost to U.S. GDP amid a slowdown in business investment. Federal spending rose at an annualized pace of more than 5% in the first half of the calendar year, more than double growth in the economy as a whole, according to the Commerce Department. That was helped particularly by military spending.
The tax cuts have also been credited with helping juice economic growth last year. Yet the effects of the reductions have since faded.
Even without the tax cuts and higher defense spending, outlays are increasing at a relatively fast clip. Mandatory allocations, which include Medicare and social security payments, are growing amid an aging population and with one of the world’s least efficient health-care systems. Interest payments are also adding up, now comprising about 8.4% of total outlays.
