CryptocurrencyInvestingBanksReal Estate

The U.S. Economy Is Booming. So Why Is the Federal Deficit at Its Highest Level Since 2012?

October 16, 2018, 10:39 AM UTC

The U.S. deficit just hit its highest level since 2012, according to the latest figures from the Treasury.

The Trump administration announced that the deficit had risen by 17% in the 2018 fiscal year to $779 billion. That’s an odd blip in an economy that’s otherwise performing well. Unemployment is at its lowest level in nearly half a century, wages are gradually rising, and inflation is “tame.” By contrast, in 2012, when the deficit topped $1 trillion the U.S. was still in the midst of digging itself out of a recession, and spending a lot to do so.

So why is the deficit trending up in such a stable economy?

Economic boom times are expected to be paired with low deficits, as economic growth leads to higher tax revenues and household incomes. That increases the government’s ability to spend while reducing the demand for social services. But in this case, circumstances have converged to produce the opposite effect.

The corporate tax cut passed last year came into effect, reducing tax collections by $76 billion, or 22% year over year. That gap was made up by increased revenues from personal and self-employment taxes, making government receipts approximately the same between 2017 and 2018. Still, the budget shortfall rose to 3.9% from 3.5% the year before. Both years were above the 40-year average of 3.2%.

A simultaneous 3% rise in spending—primarily on the military, but also on Social Security and federal debt interest— exacerbated the effect of the shortfall. The Committee for a Responsible Federal Budget warned that the deficit could once again reach $1 trillion as early as next year if trends remain the same. Other independent analyses have shown that the Republican tax cuts will result in growing deficits over time, even taking economic growth into account.

One area where revenue increased was receipts from “excise, customs and other” sources. Totaling $35 billion for September 2018, that revenue increased 35% over September 2017. That increase may be related to Trump administration tariffs on goods from the U.S.’s traditional trading partners.