On August 25, both the Congressional Budget Office (CBO) and the White House’s Office of Management and Budget (OMB) are expected to release updated estimates of the federal budget deficit. News reports indicate that the OMB’s estimate will be $262 billion smaller than what was predicted in May and will total $1.58 trillion, or about 11% of GDP, for fiscal year 2009. An analysis of CBO baseline estimates from 2001 through 2009 shows that the largest share of the deterioration in the budget outlook is due to the current recession and to policies enacted prior to 2009.
An economic downturn will automatically create deficits because job loss and income declines reduce tax revenue, and because they create more demand for public services such as unemployment insurance, nutrition assistance, and increased Medicaid spending. These factors add up to just under half of the decline in the budget outlook since pre-recession forecasts.
Policies enacted prior to the current fiscal year represent nearly half of the deterioration that occurred since 2001. Tax changes from the 2001-03 period as well as unpaid-for spending increases, including spending on the wars in Iraq and Afghanistan, represent the majority of these costs.
As a result of the current recession and tax cuts enacted over the last eight years, federal revenue in 2009 will be the lowest since 1950.
Recession-fighting measures, including financial market bailouts from late 2008 and the American Recovery and Reinvestment Act (ARRA) contributed a smaller share, 22% and 12% respectively, to the deterioration of the deficit from pre-recession projections. It is also likely that the cost of the Troubled Asset Relief Program will be revised downwards in Tuesday’s estimates.
Simply put, current deficits are overwhelmingly a result of policies put in place prior to 2009 and the current economic contraction. Only a small fraction of the deficit increase since 2001 is due to increased spending; and even a smaller share is due to policy changes since the start of the year that are unrelated to the recession. The American Recovery and Reinvestment Act has added only slightly to the deficit – contributing only about 12% to the deterioration of the 2009 budget outlook since the start of the recession.