RSSProjected Budget Deficit – Congressional Budget Office Baseline Plus Stimulus Bill
CBO Forecasts Massive Deficits
In its annual report — The Budget and Economic Outlook — released January 7, 2009, the Congressional Budget Office (CBO) notes that:
“The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II. The Congressional Budget Office anticipates that the recession—which began about a year ago—will last well into 2009.”
In response to this situation, the Bush Administration and the Obama Administration
have taken unprecedented measures to stabilize the financial system and stimulate the economy. These actions will produce enormous budget deficits for fiscal years 2009 and 2010 and perhaps beyond.
This chart illustrates the magnitude and components of the 2009 deficit.
1Starting with the actual deficit of $455 billion for the fiscal year ended September 30, 2008, CBO projects that worsening economic conditions will cause the deficit to increase by $313 billion (before taking into account the bailout of Fannie Mae and Freddie Mac, the Troubled Asset Relief Program, and the American Recovery and Reinvestment Act of 2009). Of this $313 billion, CBO estimates that roughly $250 billion is attributable to falling federal tax receipts and additional spending on some programs, such as those providing unemployment insurance and the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program).
2 The projected deficit for 2009 incorporates CBO’s estimate of the cost to the federal government of the Fannie Mae and Freddie Mac takeovers. Because those entities were created and chartered by the government, are responsible for implementing certain government policies, and are currently under the direct control of the federal government, CBO has concluded that their operations should be reflected in the federal budget. Recognizing the cost of the takeovers adds about $200 billion (in discounted present-value terms) to the deficit this year, reflecting the long-term net cost of the more than $5 trillion in credit guarantees issued and loans held by those entities at the start of the fiscal year. In addition, CBO estimates the cost of Fannie Mae’s and Freddie Mac’s new credit activity in 2009 will total $38 billion.
3 According to CBO’s estimates, more than $180 billion will be recognized as part of the deficit this year to reflect the present value of the net cost of transactions under the Troubled Asset Relief Program, which was created in the fall of 2008. That cost is the purchase price minus the present value, adjusted for market risk, of any estimated future earnings from holding purchased assets and the proceeds from the eventual sale of them. The TARP has the authority to enter into agreements to purchase assets totaling up to $700 billion outstanding at any one time, but CBO believes that the net cost over time will be much less than that amount.
4 In a letter dated February 13, 2009 to Speaker of the House of Representatives Nancy Pelosi, the Director of the Congressional Budget Office, Douglas W. Elmendorf, released the results of CBO’s analysis of the budget impact of the American Recovery and Reinvestment Act of 2009. The analysis indicated that approximately $185 billion of the $789.5 billion of spending and tax cuts would be recognized during the remainder of fiscal year 2009. The largest impact will occur in 2010 with $399 billion added to the deficit for that year.