(Bloomberg) -- The US budget deficit widened further at the start of the fiscal year, driven primarily by higher spending on health and defense as a surge in debt-interest costs slowed.
The gap for the month of October was $121 billion after adjusting for calendar differences, Treasury Department data released Wednesday showed. That’s an 89% jump from October last year, though only 22% higher after accounting for distortions from an influx of deferred tax revenue in 2023, an official said.
The figures illustrate a monumental challenge for those promising to rein in US debt. President-elect Donald Trump has tapped Elon Musk and Vivek Ramaswamy to look at ways to cut spending. Thursday’s figures showed the bulk of the outlays are in areas that are bound to be politically challenging to address.
Key drivers of the deficit widening included outlays in the Departments of Health and Human Services and of Defense, up 12% and 13% respectively, adjusted for calendar differences. Health spending alone jumped by $62 billion compared with the same month last year.
In sharp contrast with what’s been a trend for some time now, the Treasury’s debt-servicing costs only rose slightly in October. Net interest costs totaled $80 billion in October, compared with $76 billion in the same month a year before. That burden had surged to a 28-year high for the 2024 fiscal year, a by-product of the Federal Reserve’s steep interest-rate hikes in recent years.
Interest Costs
But the Fed’s success in bringing inflation down is now paying off in one respect: the Treasury doesn’t have to pay out as much on inflation-linked debt. Treasury inflation protected securities, or TIPS, pay investors not only a regular coupon as do other notes and bonds, but also offer compensation for higher consumer prices. That means when the CPI climbs, the federal government’s interest costs also rise. Now that inflation is lower, those payouts are falling.
The weighted average interest rate for total outstanding debt by the end of September was 3.30%, at roughly 15-year highs, but down slightly from the month before — the second monthly decline.
Last year’s tax receipts for the month of October were unusually higher due to deferred tax receipts that were received that month from companies and individuals affected by disasters including wildfires in California. Taking that into account, the budget deficit this October would have been 22% higher, a Treasury official said.
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