Why is the Budget Deficit Exploding?

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

  • The budget deficit was almost $1.3 trillion during the first ten months of the fiscal year (through July). That’s up from $389 billion at this point last year.
  • Spending has risen 21% over last year, while tax revenues have fallen by 17%.
  • CBO estimates that $125 billion of the increased spending and decreased revenues are the result of this year’s stimulus act.

The chart shows the main drivers of the exploding deficit:

  • Tax revenues have fallen off a cliff. Revenues have fallen 17% this year, adding $353 billion to the deficit. As noted in a recent chart from Treasury, the decline has been particularly sharp for corporate incomes taxes (down 57%) and individual income taxes (down 20%).
  • Spending on TARP and the GSEs. CBO estimates that spending to date on TARP will have net cost to taxpayers of $169 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 $252 billion to the deficit.
  • More spending on other programs. Spending on other programs has increased 14%, adding $325 billion to the deficit. These increases are spread across many program areas; for example, defense spending is up 8% and Medicare spending is up 15%. The most pronounced increases, however, are for unemployment benefits (up more than 160%) and Medicaid (up almost 24%), which have been boosted by the weak economy and expanded Federal programs.

The only piece of good news continues to be interest payments, which are down despite the explosion of federal debt. Payments have fallen on regular Treasury debt because of low interest rates and on inflation-indexed debt because of low inflation.

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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