The Exploding Federal Deficit

Yesterday, the Congressional Budget Office released its latest snapshot on the federal budget. The headlines:

  • The budget deficit was $1.1 trillion during the first nine months of the fiscal year (through June). That’s up from $286 billion at this point last year.
  • Spending has risen 21% over last year, while tax revenues have fallen 18%.
  • For the first time in more than ten years, the government ran a deficit in June. June is a big tax-paying month, so it usually records a surplus.

The charts shows the main drivers of the exploding deficit:

  • Lower tax revenues. Revenues have fallen 18%, adding $346 billion to the deficit. Income tax revenues have been particularly hard hit: individual income tax payments are down 22%, and corporate income taxes are down 56%.
  • New spending on TARP and the GSEs. CBO estimates that spending to date on TARP will have a net cost to taxpayers of $147 billion. (For more details on how CBO calculates this, see this post.) In addition, the government has injected $83 billion into Fannie Mae and Freddie Mac, the two housing GSEs. Together, these parts of the financial rescue have added $230 billion to the deficit.
  • More spending on other programs. Spending on other programs has increased almost 14%, adding $276 billion to the deficit. CBO notes that spending rose particularly sharply for Medicaid (up 23%) and unemployment insurance (up 156%). Those increases reflect recent legislation that expanded Federal spending on both programs, as well as increased enrollment in the programs due to the weak economy.
  • Remarkably, interest payments are actually lower. The public debt has, of course, been ballooning to finance rising deficits and the financial rescue. But interest payments on the debt have actually fallen, thanks to low short-term interest rates and smaller costs for inflation-indexed bonds. As a result, interest payments have been $48 billion lower this year.
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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