Why is the Budget Deficit Exploding?

Earlier today, CBO released its latest monthly snapshot on the federal budget. The key things you should know are:

  • CBO estimates that the government ran a deficit of almost $1.4 trillion during the first eleven months of the fiscal year (up from $501 billion at this point last year).
  • CBO reiterated its forecast that the full year’s deficit will also come in around $1.4 trillion (September is usually a month of surplus because of strong tax receipts, but CBO apparently thinks this September will be close to break-even.)
  • CBO’s estimate is noticeably lower than the administration’s most recent deficit forecast of $1.58 trillion. If the final numbers next month are in line with CBO’s projections, some commentators will thus spin the full year deficit as good news (“the deficit came in lower than the administration expected”), while others will spin it as bad news (“yikes, the deficit was $1.4 trillion”). (As noted in an earlier post, CBO’s summer update was a bit complicated to interpret because its headline deficit estimate used different accounting for Fannie Mae (FNM) and Freddie Mac (FRE) than the administration used; on an apples-to-apples basis, however, CBO then forecast a deficit of $1.41 trillion.)
  • As shown in the following chart, the deficit has exploded for three main reasons:

  • Tax revenues fell off a cliff (down 16% or $365 billion relative to last year). The sharpest declines have been in corporate income taxes (down 56%) and individual income taxes (down 20%).
  • The financial rescue has required $257 billion in new spending. TARP accounted for $174 billion, while cash injections into Fannie Mae and Freddie Mac accounted for $83 billion.
  • Other spending increased (up 7% or $315 billion relative to last year). These increases are spread across many spending programs, but have been most pronounced for unemployment insurance (up 160%) and Medicaid (up 25%).

In addition:

  • As noted in previous months, interest payments continue to provide a sliver of good news. Interest payments have fallen by 23% (or $55 billion) thanks to low interest rates and small inflation adjustments on indexed bonds.
  • CBO estimates that the budget impact of the stimulus totaled more than $150 billion by the end of August. That’s in line with the figures reported by Recovery.gov.
About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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