WASHINGTON – The U.S. federal budget deficit increased by $191 billion in August and has topped $1 trillion for the fourth straight year.
The deficit for the first 11 months of the 2012 budget year totalled $1.16 trillion, the Treasury Department said Thursday. That’s 6 per cent less than the $1.23 trillion in the same period last year. The fiscal year ends Sept. 30.
One reason for the improvement: Income tax receipts are up as the economy improves slowly.
Still, the report highlights a political vulnerability for President Barack Obama: He will seek reelection after running trillion-dollar deficits each year in office. Republican presidential candidate Mitt Romney has criticized Obama for failing to cut the deficit in half, as Obama pledged to do in early 2009.
The White House in July forecast that the budget gap will total $1.2 trillion this year, down from $1.3 trillion last year. Next year, the administration expects the deficit to fall just short of $1 trillion, at $991 billion.
This year’s gap is equal to about 7.4 per cent of the U.S. economy, down from 8.2 per cent in 2011.
Much of the debate in Washington during Obama’s presidency has centred on taxes, spending and budget cuts. Obama and many Democrats want to allow tax breaks to expire only for wealthier Americans. Republicans want them to expire for everybody, and also would cut popular social programs.
Republicans control the House, while Democrats have a slim majority in the Senate. That could change in January if Republicans are able to flip a few Senate seats. But Republicans still would lack the 60 votes needed to push legislation through the Senate.
Economists are increasingly worried that the gridlock will push the economy over a “fiscal cliff” at the end of the year. That’s when the tax cuts would expire if no action is taken. Deep spending cuts would take effect automatically if Congress is unable to reach a compromise.
If people are paying more taxes while the government spends less, that could push the nation back into recession, economists say.
The automatic spending reductions are opposed by both parties. The reductions would slash the defence budget, a priority for both sides, and would hit social programs that many Democrats support.
Obama is pushing to let tax cuts approved in 2001 and 2003 expire for couples making more than $250,000. That would generate more than $700 billion over 10 years. He also wants to set a 30 per cent tax rate on taxpayers making more than $1 million. That would add $47 billion to government revenue over 10 years.
Republicans say the tax increases would stifle the economic recovery by leaving businesses with less money for hiring and investing. They want deeper cuts in government programs. A budget approved by the GOP-controlled House, for example, includes sharp reductions for Medicare and additional tax cuts.
Romney has promised to cut spending to narrow the budget gap. He would cap spending at 20 per cent of gross domestic product, a measure of the nation’s overall economic output. Spending currently equals about 24 per cent of GDP.
The GOP presidential candidate also says he would save money by closing loopholes that benefit wealthier Americans. He has refused to specify which tax rules he would change. To narrow the deficit while cutting tax rates, independent analysts say, Romney would have to eliminate popular deductions like those for mortgage interest and charitable contributions.
Romney wants to cut the federal workforce by 10 per cent and eliminate $1.6 billion in subsidies to Amtrak.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.