Economic Snapshot | Budget, Taxes, and Public Investment

What goes into a budget deficit?

A number of factors impact budget deficits, and this chart shows how some recent factors affect the projected deficit of $1.1 trillion in 2012.

Though the Great Recession is technically over, the economic downturn still has a large impact on the budget, and is responsible for almost half of the projected deficit next year.[1] As one might expect, during economic downturns, incomes fall, and this leads to declining tax collections and deficit increases. Furthermore, as unemployment rises and wages fall, spending on safety net programs tends to rise. Additionally, falling asset prices (home prices and stock prices, for example) lead to falling capital gains tax collections. In short, even from a strictly budgetary perspective, recessions are costly.

In addition, the Bush tax changes, which were recently extended through the end of 2012 in the December tax deal, have a continued impact on the budget as well, constituting 19% of the projected deficit.  Spending on the wars in Iraq, Afghanistan, and other overseas operations represent another 15% of the projected 2012 deficit.

In contrast, the economic recovery measures—such as the American Recovery and Reinvestment Act, the stimulus measures in the tax compromise, and other minor pieces of stimulus legislation—make up only 16% of the 2012 deficit.  This 16% estimate, though, likely overstates the collective impact because it does not take into account that these measures have led to the employment of millions workers who have in turn paid taxes on their salaries and not relied on social safety net expenditures.

[1] This was calculated by combining economic and technical factors since the beginning of Great Recession, as identified by the CBO in their baseline updates. We feel the inclusion of technical factors since the Great Recession is appropriate because these factors have overwhelmingly been driven by changes in asset prices, interest rates, and inflation, which are a direct result of the economic downturn. 

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