How did the deficit get so large?
Written on July 16, 2009
Here are some questions and answers about the federal budget:
How does this year’s projected deficit rank in history?
The deficit will be the largest in dollar terms, but it won’t be a record in relationship to the overall economy — the comparison preferred by economists.
The Congressional Budget Office is forecasting that the budget deficit for this year will equal 13 percent of the total economy, as measured by the gross domestic product — a measure of the value of all goods and services produced in the United States.
While that would surpass the record of recent years — 6 percent of GDP, achieved in 1983, during the Reagan administration — it is far below the 1943 deficit, which was 30.3 percent of GDP. That deficit reflected the massive spending to fight World War II.
Isn’t it unusual for the budget deficit to grow so much in such a short time?
The size of the deficits this time around are unusual, but that reflects the unprecedented response the government has brought to bear to deal with the economic crisis. First, in 2008, Congress created a $700 billion financial rescue fund that had been requested by the Bush administration, and then early this year Congress approved President Barack Obama’s request for a $787 billion economic stimulus bill to jump-start growth cash advance.
Is that all that is going on with the deficit?
Unfortunately, no. Government spending is also being driven higher by what economists call "automatic stabilizers." That is spending that automatically occurs in times of economic troubles to help cushion the shock.
The government is spending billions of dollars more on such things as food stamps and unemployment compensation. In all, government outlays are up 20.5 percent through the first nine months of this budget year compared to a year ago.
Does that explain all the red ink?
No. There is one more factor at work: Government revenues have fallen by 17.9 percent in the October-to-June period compared with a year ago. That reflects the severity of the current recession. Millions of people who lost their jobs are thus not paying payroll taxes and there is a big drop in corporate tax collections as well.
What is the deficit outlook?
That is where the real problems may come. Economists say it is OK to run massive deficits now to stabilize the banking system and get the economy growing again. But they are fearful that the administration and Congress will not do enough to get future deficits under control.