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.

Comments

[Pat C:]

To what extent in actual dollars is the 20% personal income tax decline compared to the 54% for corporate? Also does the government report somewhere a comparison of FICA (Social Security) contributions? It would seem to me that comparing FICA contributions would be an excellent indicator of the employment situation rather than the BLS estimates. Personal income tax has been subject to alot of manipulation so I don't think it would be a good measurement, but FICA should be.

Oct 11 09:25 AM

[Pat C:]

It is interesting that social security contributions only decrease by 1% even though employment feel off a cliff. I don't follow?

Oct 11 09:30 AM

[Pat C:]

Sorry to keep bugging you with comments, but along the same lines, does this mean that the higher paid employees are still employed and the unemployment has been primarily in lower wage catagories? If that's the case has there really been any true downsizing of expenses by public companies? I'm very confused.

Oct 11 09:40 AM

[Moon Kil Woong:]

"As shown in the following chart, the deficit exploded in 2009 for three main reasons". Although these are accurate resons you can also say the deficit exploded in 2009 because of corrupt, self-interested, and incompetent set of elected officials. Thus, it is sad to say that the reason remains much the same as it did during the Bush Jr. Administration.

I suppose, on the bright side of the picture, I can say that at least we haven't had TARP II yet.

Oct 11 09:43 AM

[markfl:]

Actually, the govt. partially relies upon unemployment taxes to "revise" unemployment stats. The problem is that they don't use it often enough, and most investors assume that the birth/death model they use is highly flawed. The BLS underestimated job losses during the peak of the recession by 800,000. BLS should start using ADP data for its monthly revisions to the non-farm payrolls. FYI the article below is from Mr. Marron. It will give you a brief intro into the very controversial "birth/death" topic.

seekingalpha.com/artic...


On Oct 11 09:25 AM Pat C wrote:

> To what extent in actual dollars is the 20% personal income tax decline
> compared to the 54% for corporate? Also does the government report
> somewhere a comparison of FICA (Social Security) contributions?
> It would seem to me that comparing FICA contributions would be an
> excellent indicator of the employment situation rather than the BLS
> estimates. Personal income tax has been subject to alot of manipulation
> so I don't think it would be a good measurement, but FICA should
> be.

Oct 11 10:37 AM

[DavyJ:]

Personal income tax revenue was approximately 4 times the corporate tax revenue in 2008. So 20% of $1,425 billion is $285 billion and 54% of $354 billion is $191 billion using 2008 figures. FICA is also reported in the same chart. There may be more up-to-date monthly reports available on the website. Sorry, I don't have the time to research further.

www.irs.gov/pub/irs-so...

Excellent point about using FICA data to determine employment, by the way. Monthly data would be THE defining number. Much more accurate than some survey of a small percentage of the population.

On Oct 11 09:25 AM Pat C wrote:

> To what extent in actual dollars is the 20% personal income tax decline
> compared to the 54% for corporate? Also does the government report
> somewhere a comparison of FICA (Social Security) contributions? It
> would seem to me that comparing FICA contributions would be an excellent
> indicator of the employment situation rather than the BLS estimates.
> Personal income tax has been subject to alot of manipulation so I
> don't think it would be a good measurement, but FICA should be.

Oct 11 11:18 PM

[Kimball Corson:]

Moon observes "Although these are accurate reasons, you can also say the deficit exploded in 2009 because of a corrupt, self-interested, and incompetent set of elected officials. Thus, it is sad to say that the reason remains much the same as it did during the Bush Jr. Administration."

The core difficulty is the elected representatives of both parties want to see their influence, contacts and wealth increase, so they pander to the lobbyists of large corporations, the wealthy and others of influence and, in doing so, pass laws that skew the income distribution, increase the size of the federal government and run deficits like they were eating candy. We need to put a stop to it, but there is a problem. Specifically, we need effective campaign financing reform with teeth, much tighter control over lobbying and lobbyists and perhaps even some adjustments to the concept of Freedom of Speech and the Right of Petition in the context of efforts to hustle state and federal governments for laws, regulations and benefits that are contrary to the public interest but help the wealthy at the expense of the working middle classes.

The problem, of course, is that these changes in the law would have to be passed by those very same representatives who do not want to pass them because they comprise on their relationships with the wealthy, their own prospects for personal wealth and their political power bases which they want to enlarge -- the real reason our federal government continues to expand and grow beyond its optimal size. Both parties are guilty here. It is a real catch 22.

Oct 12 01:05 AM

[aussiereader4:]

Imagine what US economic growth would have been without the 10% of GDP deficit and the velocity of money in the community that resulted from this spending. Without this the US would have contracted by 20%

It looks unsustainable. When is the second dip going to happen?

Oct 12 07:35 AM

[jdl51:]

This is the final Bush budget. All of the deficit, aside from the $200 billion stimulus spending, are what's left of the Bush administration "fiscal responsibility". In other words, Obama is not responsible for this deficit and it's increased government spending. And Bush's proposed budget for 2009/2010 had a projected deficit of $1.4 trillion. So before Obama even set foot in the WH, these deficits were already baked in the cake. Not bad considering Bush started with a budget in surplus and projected surpluses as far as the eye could see. He averaged around $750 billion a year in deficits with nothing to show for it except two wars and a financial meltdown that almost destroyed our economy. Now let's see if the public will remember how well the republicans did last time they were in power and vote for them again next year.

Oct 12 09:52 AM

[Yeti:]

A major problem with the current income tax is its insane complexity. The complexity of a law that takes thousands of pages to simply express in English imposes a massive cost on the economy simply to comply. It is the true source of the so called tax gap - several hundred billion of uncollected revenue and has spawned a major industry of lawyers, tax advisors, tax preparers, etc. that in reality adds no real economic value. It also skews investments throughout the economy. The IRS has, at the cost of billions, failed repeatedly to modernize its systems largely because they can't extract the tax and process business rules from millions of lines of 40 year mainframe assembler language code written in many cases by people who are now dead or retired.

Consider the Obamacare bill - another thousand plus page monstrosity that will cost the economy tens to hundreds of billions for simple compliance and that will open the door to massive amounts of additional fraud and abuse.

The true problem is that members of Congress derive personal power and "contributions" by making the law massively complex and obscure - as watching Barney Frank et al these days makes this so totally obvious.

Oct 12 10:04 AM

[shootpar2001:]

WRONG!!!!!!!!
Bush proposed a 2009 budget; it was dead on arrival (DOA) in a Dem congress (OH! now I remember). The budget that was finally passed was the one with all the earmarks (OH, Yeh?).
How convienient to forget!!!!!!!
On Obama's watch; nice try.............


On Oct 12 09:52 AM jdl51 wrote:

> This is the final Bush budget. All of the deficit, aside from the
> $200 billion stimulus spending, are what's left of the Bush administration
> "fiscal responsibility". In other words, Obama is not responsible
> for this deficit and it's increased government spending. And Bush's
> proposed budget for 2009/2010 had a projected deficit of $1.4 trillion.
> So before Obama even set foot in the WH, these deficits were already
> baked in the cake. Not bad considering Bush started with a budget
> in surplus and projected surpluses as far as the eye could see. He
> averaged around $750 billion a year in deficits with nothing to show
> for it except two wars and a financial meltdown that almost destroyed
> our economy. Now let's see if the public will remember how well the
> republicans did last time they were in power and vote for them again
> next year.

Oct 12 11:33 AM

[Old Rick:]

jdl51 sez:This is the final Bush budget. All of the deficit, aside from the $200 billion stimulus spending, are what's left of the Bush administration "fiscal responsibility". In other words, Obama is not responsible for this deficit and it's increased government spending.
----------------------...
Wow! talk about not being able to remember history!! It was a year ago when the Dem majority split the 2009 budget in half with "the Bush budget" covering the 6 months to end of March when the second half Democrat/Obama budget could run the deficit up faster than Bush ever had. If you are going to write here, at least TRY to get your facts straight. BTW, I think that Bush and the GOP congress were complete fiscal failures as are Obama and the Dems. WE ARE TOAST!

Oct 12 11:54 AM

[jdl51:]

"Wow! talk about not being able to remember history!! It was a year ago when the Dem majority split the 2009 budget in half with "the Bush budget" covering the 6 months to end of March when the second half Democrat/Obama budget could run the deficit up faster than Bush ever had. If you are going to write here, at least TRY to get your facts straight. BTW, I think that Bush and the GOP congress were complete fiscal failures as are Obama and the Dems. WE ARE TOAST!"

Bush's 2009-2010 budget that he proposed, before Congress even looked at it, had a $1.2 trillion deficit, not including Iraq and Afghanistan, which he never included in his budgets since the wars started. So before Democrats touched it, he projected a $1.2 trillion/$1.4 trillion for this coming fiscal year which started a couple of weeks ago. Bush ran up close to $7 trillion in debt. Started at around $5 trillion and ended up close to $12 trillion, much of that when republicans had complete control of Congress. Of course, republicans have been saying for the past 30 years that deficits don't matter, except when a democrat is in charge. No one gave the dems credit when they fixed the budget mess left behind by Reagan and Bush I. They'll have to fix it again because the republicans are incapable of ever balancing a budget.

Oct 12 02:17 PM

[jr007:]

Shootpar,
Your comments are dead on...This is the first time I have seen the facts enumerated by someone... so accurately. Limbaugh and the negative Republicans who ignore these facts..are a national embaressment, bordering on treason. They want the current administration to fail so badly.. that they care not that this Country may fail as well. How I hope the electorate are not so gullible as to re-elect any of these turncoats.


On Oct 12 12:22 PM shootpar2001 wrote:

> WRONG!!!!!!!!
> Bush proposed a 2009 budget; it was dead on arrival (seekingalpha.com/symbo...)
> in a Dem congress (OH! now I remember). The budget that was finally
> passed was the one with all the earmarks (OH, Yeh?).
> How convienient to forget!!!!!!!
> On Obama's watch; nice try.............

Oct 12 05:17 PM