4 Drivers of the Exploding Federal Deficit

On Wednesday, 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.

Comments

[shootpar2001:]

........and some one we all know wants to spend more on healthcare.
Then try to tax energy........can you spell DISASTER!!!!!!!!

Imagine if Paulson's treasury would not have pushed borrowing to the short end of the curve and thus lower interest payments (2-year notes).

Jul 10 10:46 AM

[Leftfield:]

The government can't take care of it's own business any better than a 5-year-old. Let's give them more power and responsibility!

Jul 10 10:55 AM

[Living4Divi...:]

brilliant article. kudos.

Jul 10 11:15 AM

[AlexS:]

Yes, good short and clear article. Thanks.

Jul 10 11:59 AM

[Socialism c...:]

I'm starting to think "fail faster" is the only way out long term for this nation. Let them cause the collapse of their behemoth. If they scale back a bit now instead, we all languish and pay the piper for years. We actually NEED collapse of this overgrown entitlement behemoth!

Jul 10 12:50 PM

[Crocodilian:]

A thoughtful article, with useful data. The data suggest two things to me: one hopeful, the other not.

Hopeful: Much of the deficit is being driven by the recession. A return to "normal" economic activity, tax levels, and employment erase hundreds of billions of dollars of red ink.

Worrying: the practice of financing very large amounts of new debt with short terms obligations raises new challenges for Federal finances. Today there is little commercial demand for credit, so financing the deficit is relatively easy. One would prefer to see the Government increasing duration at this point, even at the risk of higher interest expense to avoid the problems of rolling over debt in a more challenging environment.

Jul 10 01:35 PM

[whidbey:]

What would have us do? Surely we can not live on less! We need sympathy not a curse for our habits. Have mercy.

Jul 10 02:41 PM

[Mr. Morbid:]

You people need to learn to look at the bright side. For a brief period after World War II the income tax in this country was 82 percent on incomes over 200,000 and look at how the economy was able to grow in spite of it! Now, naturally, we'd have to modify that number, maybe make it an 82 percent tax rate on incomes over 2 million, but really, it's just a matter of today's wealthy having the courage and the grit to show that they can produce the same kind of financial growth and innovation that their parents and grand-parents were capable of. I mean honestly, if those individuals with incomes over 2 million dollars a year in this country can't figure out how to get themselves motivated and foster new economic growth with an 82% tax rate, then they probably don't deserve the salaries they're getting to begin with. 82% on incomes over 2 million. Problem solved!

We could use a similar approach to figuring out how much to tax health-care benefits, we just take a baseline percentage of what portion of minimum wage worker's salaries their insurance deductibles represent, and use that as a benchmark to determine how much tax wealthier people should pay on their health insurance. From what I hear a full time Wal-Mart employee makes a whopping $17000 a year and only has a $3000 deductible. So you see, it's easy, we just charge those who are given deductible free executive health-coverage policies an additional 17% tax, voila! Problem Solved!

Jul 10 10:35 PM

[Hexan:]

"For a brief period after World War II the income tax in this country was 82 percent on incomes over 200,000 and look at how the economy was able to grow in spite of it!"

Let's level all of Europe, Asia, and northern Africa. Our economy will skyrocket!

Jul 11 11:07 AM