U.S. Budget Deficits: Big and Getting Bigger

October 14, 2008 07:00 PM
 

via a special arrangement with Informa Economics, Inc.

Impact: Lower entitlement spending ahead, including farm program payment cuts


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


The U.S. federal budget deficit for the fiscal year ending September 30, (Fiscal Year 2008) was $454.8 billion, sharply higher than the $161.5 billion deficit in FY07, and above the Congressional Budget Office's Oct. 7 deficit projection of $438 billion.

Reasons for the higher deficit cited by the Treasury Department included the slowing US economy's impact on individual and corporate tax receipts, and the economic stimulus package enacted in February, $116 billion of the which was added to the deficit. Total spending in FY08 rose 9.1 percent to $2.98 trillion from a year earlier, the biggest jump in annual outlays since a 9.6 percent gain in 1990. Revenue decreased 1.2 percent to $2.52 trillion, the first decline since 2003.

For perspective, the FY08 deficit is a record in dollar terms, eclipsing the previous high of $412 billion recorded in FY04. Neither, however, is a record when measured against the size of the economy (gross domestic product/GDP) – using that as a basis, the post World War II era record occurred in 1983 when the deficit hit 6 percent of GDP. The FY08 deficit is 3.2 percent of GDP, up from 1.2 percent in FY07. Deficits during WW II reached as high as 30 percent.
Implications of the growing deficit are both short- and longer-term. Presidential candidate Barack Obama (D-Ill.) has already indicated the financial rescue package and growing deficit will impact the timing of some new funding and other items he previously pledged to implement on the campaign trail.

Looking ahead, the FY09 deficit could range between $700 billion an $1 trillion, some analysts signal, considerably above a July projection by the Bush administration of $482 billion. A $750 billion deficit in FY09 would equal around 5.5 percent of the GDP. Any deficit nearing $1 trillion would have significant congressional implications, especially likely cuts to entitlement programs, including farm program payments.

“The reality is that the next president will be inheriting a fiscal and economic mess of historic proportions – the legacy of President Bush’s failed policies,” Senate Budget Committee Chairman Kent Conrad (D-N.D.) said in a statement. As noted, the FY09 deficit could approach $1 trillion, depending on several factors. A number this high would be hard to ignore politically. In July, before the recent financial crisis, the administration projected a fiscal 2009 deficit of $482 billion. A portion of the recently enacted financial sector rescue plan that allows the Treasury to buy $700 billion worth of a variety of assets will show up in future deficit figures. Treasury officials said they plan to use $250 billion of this authority to buy equity in financial companies, including $125 billion in nine of the largest banking institutions. Stephen McMillin, deputy director of the Office of Management and Budget (OMB), said this cost would be added directly to the deficit.

Also, Democratic leaders are pushing for another economic stimulus package of up to $300 billion, which would also impact future deficit projections if the package is implemented.


Comments: Well, the sins of our government's spend-happy ways of the past are on us. And not even the biggest liberal-spending lawmaker in next year's new Congress can deny the fact that the word is now CUT and not SPEND. Some will still try to add on to the monstrous deficit, but something has to be done to throttle spending, and reduce the deficit. Yes, even some potential revenue enhancers -- tax increases, or at the least, no extensions to some of the expiring tax cuts.

President Bush came into office with a total U.S. federal debt of around $5 trillion. He will leave office with the tally about double that amount. And the Congressional Budget Office (CBO) estimates that the total debt will rise to $13.5 trillion by 2013 -- even if the tax cuts are not extended. That would equate to around 75 percent of the nation's economic, or GDP, and a level not seen since 1951, when the nation was rebuilding and facing debt following World War II.

And then there is the albatross of paying interest on all that debt. For Fiscal Year 2008 alone, interest on the nation's debt amounted to $441 billion! That is what the U.S. government spent for nine agencies during FY 2008 -- for USDA, Energy Dept, Education Dept, Health and Human Services, Interior, Homeland Security, Veterans Affairs, the Justice Dept, and the EPA.

Congress and the new president will also eventually have to deal with the $53 trillion in entitlement spending ahead for the 78 million baby boomers via Social Security, Medicaid and Medicare promises that just can't be made to the degree promised.

Bottom line: Belt tightening is ahead. Count on it. Even Washington is starting to understand the ugly math.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


 

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