June Monthly Treasury Statement: Fiscal Year-To-Date Deficit Exceeds $1T

Yesterday, the Department of Treasury released its monthly treasury statement for June. The publication showed that the reported federal budget deficit for Fiscal Year 2009 had exceeded $1 trillion, reaching $1.086 trillion. In addition, monthly revenue was down 17.1% from June 2008 and 22.1% from June 2007.

This is the first issue of the monthly treasury statement to indicate a $1 trillion deficit. Broader measures show an even worse fiscal deterioration. Recent data for changes in total public debt outstanding are:

FY 2006: $574.3 billion (reported deficit: $248.2 billion)
FY 2007: $500.7 billion (reported deficit: $162.8 billion)
FY 2008: $1,017.1 billion (reported deficit: $454.8 billion)
FY 2009: $1,520.6 billion (reported deficit: $1,086.3 billion)

The steep decline in federal revenue is consistent with recession-driven outcomes. However, its magnitude is much larger than occurred during the two most recent recessions. During the previous two recessions, monthly federal revenue fell $7.2 billion from June 1990 to June 1991 and $32.2 billion from June 2000 to June 2002. Since June 2007, monthly federal revenue has fallen $61.1 billion. That has put monthly federal revenue well below the trend line since 1990.



In a policy effort to provide economic stimulus, federal expenditures continue to increase. Should some of the increased federal spending be transformed into permanent programs or should significant new programs be adopted that are not budget-neutral, those developments could add to the nation’s structural budget deficits.

Over the medium-and longer-term, increased structural deficits could undermine the U.S. fiscal position. Should private investors and foreign holders of U.S. debt instruments, who hold a combined 75% of gross public debt become concerned about the nation’s long-term fiscal situation, that development could lead to higher long-term interest rates. Increased long-term interest rates would suppress the nation’s long-term growth trajectory, reducing tax revenue below figures that would otherwise prevail, increase debt servicing costs for the federal government, and make it more difficult for the federal government to finance all of the programs it seeks to fund, possibly leading to difficult trade-off choices.

On account of those risks, it will be important for policymakers to think beyond the current recession. A medium-term fiscal strategy will need to entail a sufficient withdrawal of temporary stimulus, as well as credible measures aimed at addressing the nation’s structural budget challenges. In the meantime, policymakers should seek to “do no harm” in applying strict budget neutrality to any permanent programs they might seek to adopt.

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