Talking about the Deficit - Part 1

So the federal deficit will be an issue that we will be discussing a lot this semester. So I thought I'd put together a series of posts on it, that link to some good solid info.

What is the deficit?

For any given year, the federal budget deficit is the amount of money the federal government spends (also known as outlays) minus the amount of money it takes in (also known as revenues). If the government takes in more money than it spends in a given year, the result is a surplus rather than a deficit.

When the economy is weak, people’s incomes decline, so the government collects less in tax revenues. This is one reason why the deficit often grows during recessions. Conversely, when the economy is strong and tax revenues increase, the budget deficit shrinks.

How big is the current deficit?

The deficit for fiscal 2009 was $1.4 trillion and, at an estimated 10 percent of Gross Domestic Product (GDP), was the largest deficit relative to the size of the economy since the end of World War II. Under current policies, deficits will likely exceed $1 trillion in 2010 and 2011 and remain near that figure thereafter.

What are the major causes of the rise in the deficit?

The recession:

Much of the horrific explosion in the national debt—the deficit soared from $248 billion in 2006 to $1.4 trillion in the recently concluded Fiscal Year 2009—can be pinned on cyclical factors. When the economy goes in the tank, it creates a fiscal double whammy, gutting tax receipts and boosting demand for government spending programs that are both ordinary (increasing unemployment benefits) and extraordinary (bailouts, stimulus). Spending rose 18 percent and revenues fell 16.6 percent in fiscal 2009—the worst decline seen since the 1930s, with corporate income taxes plummeting 55 percent. Had revenues been steady, the deficit would have been only (only, he said) $1 trillion

Bush Administration Policies:

Some commentators blame recent legislation — the stimulus bill and the financial rescues — for today’s record deficits. But those costs pale next to other policies enacted since 2001 that have swollen the deficit. They are less conspicuous now, because many were enacted years ago, and they have long since been absorbed into CBO’s and other organizations’ budget projections.

Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and $7.1 trillion in 2009 through 2019, including the associated debt-service costs. These impacts easily dwarf the stimulus and financial rescues. Furthermore, unlike those temporary costs, these inherited policies (especially the tax cuts) do not fade away as the economy recovers (see Figure 1).

Without the economic downturn and the fiscal policies of the previous Administration, the budget would be roughly in balance over the next decade. That would put the nation on a much sounder footing to address the demographic challenges and the cost pressures in health care that darken the long-run fiscal outlook.

Obama Administration Policies:

Mr. Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.

About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.

If the analysis is extended further into the future, well beyond 2012, the Obama agenda accounts for only a slightly higher share of the projected deficits.

All together now:

— “The first category — the business cycle — accounts for 37 percent of the $2 trillion swing.”

— Second, Bush-era legislation “like his tax cuts and the Medicare prescription drug benefit, [that] not only continue to cost the government but have also increased interest payments on the national debt.”

— Third, “Obama’s main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000 [...] 20 percent of the swing.”

— Fourth, “About 7 percent comes from the stimulus bill that Mr. Obama signed in February.”

— Fifth, “only 3 percent comes from Mr. Obama’s agenda on health care, education, energy and other areas.”

So these are just the facts about our current deficit. My next post will focus on what having such a large deficit means, why its good to deficit spend sometimes, why its bad other times, and whether right now is the former or the latter.

Linked articles/Further reading:

• Deficits and Debt 101 - Center for American Progress
• Policy Basics: Deficits, Debt, and Interest - Center on Budget and Policy Priorities
• America’s Sea of Red Ink Was Years in the Making - David Leonhardt NYT
• What Caused the Budget Deficit? - Matthew Yglesias
• President Obama Largely Inherited Today’s Huge Deficits - Center on Budget and Policy Priorities
• The Right Target: Stabilize the Federal Debt - Center on Budget and Policy Priorities
• The current deficit debate is for the birds - Daniel Gross
• Who's To Blame for the Massive Deficit? - Cato Institute