Second Biggest Deficit in 65 Years

by: Kurt Brouwer

The Congressional Budget Office (CBO) just announced that this year’s Federal budget deficit will be the second biggest in the past 65 years. Last year’s was the biggest. Through 11 months we already spent $1.3 trillion more than we took in. For the full year, it will obviously be north of $1.3 trillion. This post from the CBO Director gives us the bad news [emphasis added]:

The federal government incurred a deficit of nearly $1.3 trillion in the first 11 months of fiscal year 2010, CBO estimates in its latest Monthly Budget Review—a total that is about $100 billion less than the shortfall recorded through August of last year. Outlays are about 2 percent less than they were in the first 11 months of 2009, whereas revenues have increased by 1 1/2 percent.

CBO recently released its latest annual budget estimates for 2010 and beyond in the Budget and Economic Outlook: An Update. CBO estimates that the deficit for 2010 will be about $70 billion below last year’s total, but will still exceed $1.3 trillion. Relative to the size of the economy, this year’s deficit is expected to be the second-largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), that deficit will be exceeded only by last year’s deficit of 9.9 percent of GDP.

Having a deficit of 9-10% of GDP is unsustainable. It will lead to a buildup of debt that will eventually trigger higher interest rates and those higher rates will add to the deficits.

Also, it seems this deficit is lower, but only due to some budgetary magic. We have not spent some funds that were allocated for TARP and other programs. The CBO Director continues:

By CBO’s estimate, spending through August was $77 billion (or about 2 percent) less than during the same period last year. That decline includes a net reduction in outlays of about $373 billion for three items related to the financial crisis: the costs of the TARP (a reduction of $274 billion from 2009), payments to Fannie Mae and Freddie Mac (a drop of $42 billion), and federal deposit insurance (a decline of $57 billion). Excluding those three programs, outlays through August increased by $296 billion (or 10 percent) relative to spending in the same period last year. Slightly more than one-third of that increase stemmed from provisions in the American Recovery and Reinvestment Act (ARRA), the majority of which was for the State Fiscal Stabilization Fund and other Department of Education programs, additional unemployment benefits, refundable tax credits, and the federal share of Medicaid assistance.

This year we have seen very large — also unsustainable — increases in Social Security, Medicare, Medicaid, and unemployment expenses, not to mention higher interest costs.

Several major entitlement programs accounted for another one-third of the overall increase in spending. Social Security benefits increased by $34 billion (or 6 percent) and Medicare expenditures rose by $19 billion (or 5 percent). Excluding spending under ARRA, outlays for unemployment benefits were $35 billion higher and Medicaid spending was $12 billion higher than in the previous year. Outlays for net interest on the public debt were $24 billion (or 13 percent) higher than during the same period last year. Most of that growth reflects adjustments to the value of inflation-indexed securities.

This little section should not be overlooked:

…With an increase of $41 billion, receipts from the Federal Reserve were more than double the amount received in the comparable period in 2009. The Federal Reserve’s higher remittances stem from a much larger portfolio and a shift to riskier and thus higher-yielding investments…

What could possibly go wrong with the Federal Reserve taking on riskier investments?

Hat tip: Instapundit & Reason