Looking Back at Fiscal 2009

A few days ago, CBO released its latest snapshot on the federal budget, documenting the remarkable challenges of fiscal 2009, which ended on September 30. The key phrase in the report is “in over 50 years” as in:

• At $1.4 trillion, the budget deficit was 9.9% of gross domestic product, the largest, relative to the economy, in over 50 years.

• At $3.5 trillion, spending was almost 25% of GDP, the largest, relative to the economy, in over 50 years.

• At $2.1 trillion, tax revenues were about 15% of GDP,  the lowest, relative to the economy, in over 50 years. (I get the sense that this point is less well-known than the other two.)

Other highlights from the report:

• As expected, CBO estimates that the 2009 deficit was about $1.4 trillion, below the $1.58 trillion estimate in the Administration’s August budget forecasts. Assuming CBO is right, that means that next week, when the official Treasury figures are released, the Administration will be able to put a good news spin on the results, saying the deficit was less than it anticipated.  (As noted in an earlier post, CBO’s summer update, released on the same day as the Administration’s, predicted a $1.4 trillion full-year deficit, when calculated on an apples-to-apples basis. The report was a bit complicated to interpret, however, because its headline deficit estimate used different accounting for Fannie Mae and Freddie Mac, which resulted in a higher figure of about $1.6 trillion.)

• As shown in the following chart, the deficit exploded in 2009 for three main reasons:

• Tax revenues fell off a cliff (down 17% or $419 billion relative to fiscal 2008). The sharpest declines were in corporate income taxes (down 54%) and individual income taxes (down 20%). The declines reflect both the weak economy and, to a lesser extent, efforts to provide stimulus.

• The financial rescue required $245 billion in new spending. TARP accounted for $154 billion, while cash injections into Fannie Mae and Freddie Mac accounted for $91 billion.

• Other spending increased (up 13% or $347 billion relative to last year). These increases were spread across many spending programs, but were most pronounced for unemployment insurance (up 156%) and Medicaid (up 25%).

In addition:

• Interest payments provided a sliver of good news. Interest payments fell by 23% (or $61 billion) thanks to low interest rates and small inflation adjustments on indexed bonds.

• CBO estimates that the budget impact of the stimulus totaled about $200 billion by the end of September.