Oct. 20 (Bloomberg) -- The U.S. government had a record budget deficit of $374.2 billion in 2003, three years after posting the largest surplus ever, figures from the Treasury Department show. The shortfall for the fiscal year, which ended Sept. 30, compares with White House forecasts of less than $400 billion on Oct. 8, and of $455 billion in July. The largest prior deficit was $290 billion in 1992, early in a record expansion and just before President Bill Clinton, a Democrat, began his first term. The deficit, almost as big as Australia's economy, has become a liability for Republican President George W. Bush, author of $1.7 trillion in tax cuts, as the election year approaches. The war in Iraq, military operations in Afghanistan and campaign against terrorism have also driven up spending while job losses and smaller capital gains have cut revenue. ``We've reduced our tax base just when our spending is rising,'' said Lyle Gramley, a former Federal Reserve governor, now an adviser at Schwab Capital Markets in Washington. ``Unless we're lucky, we'll have big deficits as far down the pike as the eye can see. My expectation is next year's deficit will be $100 billion larger.''
The White House said that the smaller deficit than forecast in July shows that the economy is gathering momentum. At the same time, it said that the gap would widen further in 2004. The shortfall follows a deficit of $157.8 billion in 2002 and four years of surpluses before that, including a high of $237 billion in 2000, government statistics show.
Revenue, Spending < br> Revenue for fiscal 2003 fell 3.8 percent to $1.8 trillion, according to the Treasury, and government spending rose 7.2 percent to $2.2 trillion. For September, typically a surplus month because taxes are due, the surplus narrowed to $26.4 billion from $42.4 billion a year earlier. Any economic growth spurred by Bush's tax cuts won't be enough to eliminate annual budget deficits, Comptroller General David M. Walker said Oct. 5 in an interview with Bloomberg News. The U.S. must make ``tough choices'' on taxes and spending over the next eight years before a ``demographic tidal wave'' of Americans born after World War II begins to retire and collect Social Security benefits, according to Walker, head of the General Accounting Office, an investigative agency for Congress. ``We are headed for very difficult choices as a country, and this president is making the situation far worse by digging holes deeper,'' said Senator Kent Conrad, senior Democrat on the Senate Budget Committee. Bush has argued that his $1.7 trillion, 10-year tax cut and spending reductions will slice deficits in half by 2006. House Budget Committee Chairman Jim Nussle said the deficit numbers show the need for Congress to restrain spending.
Administration Comment
Economic growth may have accelerated to 5.8 percent at an annual rate in the third quarter, which ended Sept. 30, according to the median of 47 forecasts in a Bloomberg News survey of economists. That compares with 3.3 percent in the second quarter of this year and would be the fastest since 7.1 percent in the final quarter of 1999. ``Today's budget numbers reinforce the indications we have seen for some months now, that the economy is well on the path to recovery,'' Treasury Secretary John Snow said in a statement. White House Budget Director Joshua Bolten said the improvement since July ``is an encouraging sign that the recovery is gaining momentum.'' The gap is likely to exceed $500 billion this year, ``even with a strengthening economy,'' Bolten said. Australia's gross domestic product was $403.6 billion 2002, according to the International Monetary Fund.
Worst Numbers
The 2003 deficit represents about 3.5 percent of gross domestic product, based on the median forecast. That's below the 4.6 percent of GDP in 1992 and the record 5.9 percent of GDP in fiscal 1983 under President Ronald Reagan. Snow, in a speech last week to the Conference Board, a business research organization in New York, urged Congress to help solidify the recovery by passing Bush administration proposals to boost trade and lower taxes, health-care costs and energy prices. The economy has lost 2.7 million jobs since employment peaked in February 2001, the month after Bush took office and just before the start of an eight-month recession. ``The worst deficit numbers are usually a year or two after the recession,'' said Christopher Low, chief economist at FTN Financial, an arm of First Tennessee National Corp.
Competition for Money
The increase in government borrowing needs to cover the budget deficit has contributed to rising interest rates. The Treasury projected in July that it will borrow a record $230 billion in the second six months of 2003. The Treasury sold a record $60 billion in three-year, five- year and 10-year notes in August to cover the deficit, and bond yields have risen in anticipation of increased borrowing. As of today, yields on 10-year Treasury notes had risen to 4.37 percent from a 45-year low of 3.07 percent in mid June. The deficit may grow to $600 billion in fiscal year 2004, as the U.S. increases spending on Iraq and election-year programs such as a proposed prescription drug benefit, according to some of Wall Street's biggest bond trading firms. The Congressional Budget Office this month projected a $480 billion deficit for 2004 after forecasting $374 billion for 2003. Ian Morris, chief U.S. economist at HSBC Holdings Plc in New York, is the most bearish on the deficit, predicting a $630 billion shortfall for fiscal 2004. ``A higher cost of capital means lower investment, lower output and lower productivity, so the economy could suffer over the longer term if these kinds of deficits persist,'' Morris said. Higher interest rates may show up within 18 months if companies increase bond sales while the government borrows more, he said. //www.bloomberg.com