Budget Year Begins with $140.4B October Deficit

By Martin Crutsinger | November 10, 2010 | 5:40 PM EST

Washington (AP) - The federal government began the new budget year with a deficit that fell 20 percent from a year ago but still the third highest October imbalance on record.

The Treasury Department said Wednesday that last month's deficit totaled $140.4 billion, down by $35.9 billion from the record holder for the month, an imbalance of $176.4 billion in October 2009.

Even with the improvement, the red ink last month set the stage for what is expected to be a third consecutive year of $1 trillion-plus deficits. The flood of red ink contributed to a political backlash that cost Democrats dearly in last week's elections.

The decline in the October deficit compared with a year ago reflected a 7.9 percent rise in revenues, a gain that partly reflected higher payments by the Federal Reserve to the Treasury on its holdings.

The Fed's holdings of government and corporate debt have ballooned as the central bank has worked to protect the financial system and jump-start economic growth. Last week, the Fed announced it planned to pump an additional $600 billion into the financial system over the next eight months in an effort to boost a sluggish economic recovery.

Government outlays fell by 8.1 percent this October compared with a year ago, but a large part of that improvement reflected a calendar shift. Because Nov. 1 fell on a weekend a year ago, various government benefit payments were made in October that year, boosting the deficit for that month.

Last year's federal deficit totaled $1.29 trillion, second highest in history, down from the all-time record of $1.42 trillion set in 2009. The government's budget year begins on Oct. 1 and ends on Sept. 30.

The Obama administration in July forecast that the deficit for the current 2011 budget year would be $1.42 trillion, but many private economists believe the figure will be slightly lower.

Major securities firms who handle the government's debt projected last week that the 2011 deficit would total $1.2 trillion, marking the third straight year that the deficit will be above $1 trillion. The firms forecast a $1.02 trillion deficit for 2012.

As a percentage of the total economy, the 2009 deficit represented 10 percent of the gross domestic product, the highest amount since it stood at 21.5 percent in 1945, when the country was borrowing heavily to fight World War II. The 2010 deficit was the second highest over the past 65 years at 8.9 percent of GDP.

Last year, the government had to borrow 37 cents out of every dollar it spent as tax revenues lagged, even as spending on food stamps and unemployment benefits surged for a nation languishing in recession.

President Barack Obama and other Democrats argued that the government had to spend large amounts of money on an economic stimulus and to stabilize the banking system to prevent an even more disastrous economic downturn. 

But Republicans won enough seats to take control of the U.S. House with the argument that government spending has been ineffective in combatting the recession while unemployment is stuck at painfully high levels.