The While House on August 25 released an updated estimate of the federal budget deficit, which shows it now totals $1.6 trillion or 11.2% of gross domestic product. This is $262 billion less than what was estimated in May. The Congressional Budget Office showed a smaller improvement. The new numbers confirm earlier EPI research showing that the recession is the main cause of the deficit deterioration. Lower incomes, higher unemployment, and reduced business activity have all combined to produce the lowest level of federal revenues – as a portion of GDP – in more than 50 years. Policy measures aimed at stabilizing the economy have also added to the deficit, though to a much smaller extent: Stimulus investments made under the American Recovery and Reinvestment Act accounts for only about one-eighth of the deterioration in the 2009 deficit relative to pre-recession estimates.
Some will use this report as an opportunity to call for immediate action to reduce the deficit, or to suggest that we need to abandon or delay major policy initiatives, like health care reform. But given that the current deficit is largely caused by the recession, any near-term deficit reduction would choke off the recovery and, in the end, would be both irresponsible and self-defeating. –John Irons