The Exploding Federal Deficit

Last week, the Congressional Budget Office released it’s latest snapshot on the Federal budget. CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009). During the same period last year, the deficit was “only” $319 billion. Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading).

Last week, the Congressional Budget Office released its latest snapshot on the Federal budget.  CBO estimates that the federal budget deficit was $984 billion — just short of a trillion dollars — during the first eight months of the fiscal year (October 2008 through May 2009).  During the same period last year, the deficit was “only” $319 billion.

Why has the deficit been exploding so rapidly? Lower tax revenues and higher spending (yes, that’s obvious, but keep reading):

Exploding Deficit

As the chart shows, there have been three basic factors driving up the deficit:

  • Lower tax revenues.  Revenues have fallen almost 18% since last year, adding $297 billion to the deficit.  Income tax revenues have been particularly hard hit: individual income tax payments are down more than 20%, and corporate income taxes are down more than 60%.
  • New spending on TARP and the GSEs. CBO estimates that taxpayers will lose $130 billion on the TARP investments made to date.  In addition, the government has paid $60 billion to Fannie Mae and Freddie Mac, the two housing GSEs.  Together, these parts of the financial rescue have added $190 billion to the deficit.
  • More spending on other programs.  Spending on other programs has increased more than 12% over the same period, adding $222 billion to the deficit. CBO notes that spending rose particularly sharply for Medicaid (up 21%) and unemployment insurance (up 140%).  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, there’s a fourth factor that has slightly reduced the deficit over the same period:

  • Lower (!) interest payments on the public debt.  The public debt has, of course, been growing rapidly in order to finance rising deficits and the financial rescue.  But interest payments have actually fallen, thanks to low short-term interest rates and smaller costs for inflation-indexed bonds.  As a result, interest payments have been $44 billion lower this year.

11 thoughts on “The Exploding Federal Deficit”

  1. ” CBO estimates that taxpayers will lose $130 billion on the TARP investments made to date.”

    Does that mean that there is an imputed gain buried in these numbers? If that’s the case, what confidence can we have that $130 billion is at all a realistic estimate of the net loss?

    1. Hi Tim —

      The short answer is yes, the estimates presume some gains from some TARP investments. Some of the preferred stock investments have gone up in value, for example, and the government has received dividends and some warrants that have value. On the other hand, we’ve also lost money on some deals, most notably the initial money into GM and Chrysler. TARP accounting is a bit complicated — I might blog about it one day — but the basic idea is that CBO calculates a net present value based on the money out, a projection of future money back in, and a discount rate that accounts for the time value of money and a measure of risk.

      P.S. A big question is whether some gains and repayments in TARP get recycled into new investments and, if so, how profitable those will be.

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