US deficit falls!? Sort of. For now.

Lower than anticipated costs of the financial and auto bailouts are trimming the US deficit. But underlying spending is rising.

Mark Duncan/AP/File
Workers at General Motors' Lordstown Assembly plant in Lordstown, Ohio, put the final touches on 2011 Chevrolet Cobalts in this June photo. GM, which is once again profitable, is paying back its federal bailout money ahead of schedule, which is helping trim the US deficit.

According to the preliminary numbers from the Congressional budget office, the U.S. federal deficit for the first 10 months of fiscal year 2010 (October 2009-September 2010) fell to $1,174 billion from $1,267 billion in the first 10 months of fiscal year 2009 (October 2008-September 2009).

However, this shift reflects entirely that much of the feared costs from the bailouts seem to be recovered. During the first 10 months of 2009, the budgeted costs of TARP and the aid to Fannie Mae and Freddie Mac totaled $252 billion, whereas in fiscal year 2010, these two posts produced a net gain of $67 billion.

Also, the cost of deposit insurance fell by $50 billion.

Furthermore, revenues from the Federal Reserve rose by $37 billion as its interest income from holding mortgage backed securities far exceeds the cost of paying interest on bank reserves (not to mention the zero interest cost for another liability in its balance sheet, issued Federal Reserve Notes (aka physical cash)).

While the deficit fell by $93 billion including these posts, the deficit excluding these posts rose by as much as $313 billion. Considering the fact that there has been a recovery (albeit a very weak one) this is very bad.

Part of this is due to the fact that there is a certain time lag between economic activities and tax payments (while income tax receipts are down for the budget year as a whole they have been slightly above year ago levels in recent months), but it is mostly related to a continued surge in core (excluding TARP and Fannie & Freddie) federal spending which is up by 10% compared to a year ago. This in turn is in part due to the "stimulus package" and in part due to Obama's long term strategy of expanding the size of government.

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