By Kate Davidson 

WASHINGTON -- The U.S. government ran its largest budget deficit in six years during the fiscal year that ended last month, an unusual development in a fast-growing economy and a sign that -- so far at least -- tax cuts have restrained government revenue gains.

The deficit totaled $779 billion in the fiscal year that ended Sept. 30, up 17% from $666 billion in fiscal 2017, the Treasury Department said Monday. The deficit is headed toward $1 trillion in the current fiscal year, the White House and Congressional Budget Office said.

Deficits usually shrink during economic booms because strong growth leads to increased tax revenue as household income, corporate profits and capital gains all rise. Meantime, spending on safety-net programs like unemployment insurance and food stamps tends to be restrained.

In the last fiscal year, a different set of forces was at play as economic growth sped up. Interest payments on the federal debt and military spending rose rapidly, while tax revenue failed to keep pace as the Republican tax cuts for both individuals and corporations kicked in.

"The deficit is absolutely higher than anyone would like," Kevin Hassett, chairman of the Council of Economic Advisers, said last week. He said the administration's budget for next fiscal year will take "a much more aggressive stance" on curbing federal spending.

Democrats blamed the tax cuts for the growing deficit.

"A deficit of this magnitude in an economy this strong is historically unprecedented," said Jason Furman, chairman of the Council of Economic Advisers in the Democratic administration of President Obama and an economic policy professor at Harvard University.

"Undertaking permanent fiscal stimulus [through tax cuts] at this stage of the economic expansion is contrary to all sound tenets of economic policy," he said, adding that stagnant government revenue was proof that tax cuts don't pay for themselves, as Republicans have argued.

Trump administration officials said that the tax cuts are driving faster economic growth, which will eventually lead to big increases in tax revenue.

Higher government spending and flat revenue combined to drive the deficit to 3.9% of gross domestic product, up from 3.5% of GDP the year before.

By comparison, the last time the jobless rate was below 4%, in 2000, the U.S. ran a budget surplus of 2.3% of GDP. Revenue that year rose 11% from a year earlier. And in 1969, when the jobless rate last touched 3.7%, the U.S. ran a budget surplus equal to 0.3% of GDP. Revenue was up 22% that year.

Annual economic output grew 5.4% between the second quarter of 2017 and the second quarter of 2018, not adjusted for inflation. Government revenue for the fiscal year rose 0.4% to $3.3 trillion through September, also not adjusted for inflation.

The 2018 fiscal-year results include three months -- October, November and December -- before the new tax law took effect, likely providing a boost to the overall revenue picture that faded as the tax cuts took effect.

Starting in February, paycheck withholding was reduced, lowering individual income tax collections to reflect changes in tax rates that will leave most households paying less for 2018 than in 2017. Also, businesses make estimated tax payments throughout the year and they were able to send less to the IRS because of the tax rate cuts.

Last fiscal year, income taxes withheld for individuals rose 1% but corporate tax receipts fell 31% -- both reflecting the broad tax overhaul enacted in December. Individual rates were reduced by varying amounts across income thresholds while the corporate tax rate was slashed to 21% from 35%.

At the same time, government spending rose 3% last year, to $4.1 trillion. Rising interest rates and the amount of total debt outstanding drove up federal interest costs 14% last year from fiscal 2017, or $65 billion. Mr. Trump has complained that Federal Reserve interest rate increases are driving up government costs.

Spending on military programs also rose last year by 6%, or $32 billion, while Social Security costs climbed 4%, or $39 billion. Government spending as a share of GDP declined, but federal revenue fell even more -- to 16.5% of GDP last year from 17.2% in the previous year -- pushing the deficit higher.

Administration officials said the year-end deficit figure is smaller than they had projected earlier this year. They also said it would take some time for the benefits of tax cuts to filter into the budget and boost revenue.

White House budget director Mick Mulvaney said Monday the growing economy was "an important step toward long-term fiscal sustainability."

"Going forward, President Trump and this administration will continue to work with Congress to make the difficult choices needed to bring fiscal restraint, which, when matched with increasing revenue, will reduce our deficit," he said.

Costs associated with an aging population, including higher Social Security and Medicare spending, are expected to continue pushing up deficits over the coming decades. That could constrain the government's ability to respond to future recessions or other crises.

To restrain deficit growth, the president's last two budgets called for trillions of dollars in cuts to programs including food stamps, disability benefits, welfare and student loans.

Rep. Nancy Pelosi of California, the Democratic leader, said: "Republicans have exposed their true agenda in budget after budget: add trillions to the deficit, and then use those deficits to justify slashing the Medicare, Medicaid and Social Security that seniors and families rely on."

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

October 15, 2018 20:56 ET (00:56 GMT)