CBO Updates Budget Deficit to $1.845 Trillion for 2009

Since the Congressional Budget Office (CBO) last issued its baseline projections in January 2009, the outlook for the budget deficit has deteriorated further. Enactment of stimulus legislation and omnibus appropriations, a worsening of the economic outlook, and other factors have increased CBO’s projections of the deficit by more than $400 billion in both 2009 and 2010 and by smaller amounts thereafter. As a result, if current policies remain the same, CBO now anticipates that the deficit will total almost $1.667 trillion (using the CBO baseline projection format). After updating its own baseline projection, CBO then analyzed the president’s budget for 2010 that contains further budget provisions for the current year which ends September 30, 2009. (By law, CBO’s baseline projection assumes that whatever laws are currently in effect will remain in effect. Therefore, the CBO’s baseline projection does not take into account the budget changes proposed by the president.) The CBO runs a separate analysis of the president’s budget to determine the projected deficit using the president’s proposals. Assuming that the changes proposed by the president are, in fact, enacted, CBO estimates that the 2009 budget deficit will total $1.845 trillion for the current year.

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.

Estimates by the Congressional Budget Office place total funding for operations of the Iraq and Afghanistan War on Terrorism at $651 billion as of December 2007. This amount includes $87 billion of the $188 billion requested by the President for 2008. If Congress approves the remaining $101 billion for 2008, this will bring the seven-year total for the war to $752 billion. As can be seen from the chart, while these numbers have contributed to the deficits for the past seven years (just like all other forms of spending have contributed to the deficits), they were clearly not the difference between a deficit and surplus situation for the time period.

For more detail, see
  [1] Analysis of the Growth in Funding for Operations in Iraq, Afghanistan, and Elsewhere in the War on Terrorism.
  [2] Historical Tables, Budget of the United States Government, Fiscal Year 2009

The term tipping point can be applied to a process in which, beyond a certain point, the rate at which the process continues will increase dramatically. The budget of the United States has reached its tipping point. A recent event could have, in fact, marked the point in time. The first Baby Boomer—born January 1, 1946—has applied for early retirement at age 62 and received her first Social Security check. On the chart, an upturn in the Medicare growth rate can be detected in 2011 when the first Baby Boomers turn 65. Thereafter, the number of retirees continues to increase while the number of workers per retiree continues to decrease. The pyramid scheme has collapsed.

This is the first, and only, chart in this presentation that is expressed in terms of constant dollars, with a base year of 2008 having been selected. This chart attempts to quantify the size of the commitment that lies ahead with Social Security and Medicare (leaving Medicaid aside for the moment). Using constant dollars removes the inflation factor from the projections thereby bringing some perspective to the numbers. Without this adjustment, the numbers would be far too large to make any sense. The total of the projected deficits—$83 trillion—through the year 2085 averages roughly $1 trillion per year in constant 2008 dollars. Contrast this with the fact that the surplus for the combined programs in 2008 was approximately $69 billion. If the message is not yet clear, it is this…The Spending Trend is not Sustainable.

*Note: Projections based on the intermediate assumptions of the 2008 Trustees’ Reports. The CPI is used to adjust from current to constant dollars.

The problem with the CBO Baseline is that the projection is based upon an assumption that has no historical basis. The assumption is that the growth in health care spending will decline to a growth rate that is 1% greater than GDP growth. In fact, the historical increase in Medicare and Medicaid spending has averaged 2.5 percentage points greater than the growth of GDP over the past 40 years. Using the historical rate of increase, Medicare and Medicaid alone would consume all tax collections by 2044 if the tax rate remained at the 2007 level of GDP (18.8%).

In this ten-year projection, the United States Government Accountability Office begins with the “baseline projection” prepared by the Congressional Budget Office, and makes three assumptions to arrive at its “alternative simulation.” (1) discretionary spending grows with the economy after 2008; (2) all expiring tax provisions are extended including the 2007 AMT exemption amount; and (3) Medicare spending is based on the April 2007 Trustee‘s intermediate projections adjusted for CMS’s alternative assumption that physician payments are not reduced as required under current law. These three modifications would result in sizable deficits, mostly as a result of lower than projected tax receipts contained in the CBO baseline projection.

In January of each year the Congressional Budget Office publishes The Budget and Economic Outlook, which contains, among other items, its “baseline projection” for the next ten budget years. The term baseline as used here simply means that the projection serves as a starting point for further discussions. The baseline projection shows the projected path of spending and taxes under current laws and policies. Thus, it assumes that spending for the wars in Afghanistan and Iraq will continue. It also assumes that the tax cuts of 2001 and 2003 will expire as scheduled after 2010 and that tax revenue will therefore rise sharply. Mandatory spending is forecasted to grow at a rate of 1% over the growth in GDP, while discretionary spending is expected to grow at less than the rate of inflation, which is lower than the growth of GDP. As a result, mandatory spending is forecasted to rise as a percentage of GDP (to 12.0%) by 2017, while discretionary spending is expected to fall to 6.4% of GDP by that year. Under these assumptions, the budget would emerge from its chronic deficit state to a series of surplus years beginning in 2012, mostly as a result of increased tax collections.

We have seen how the national debt has risen to its current level as a result of deficit spending. We have looked at deficit spending in absolute dollars as well as a percentage of the gross domestic product. The relationship of the federal budget to the country’s GDP establishes a foundation for understanding the potential outcomes of proposals to continue or change current fiscal policies. This chart simply asks the question: Can we expect budget surpluses or budget deficits in the future?

This chart illustrates how the $162 billion dollar deficit was created during the fiscal year that ended September 30, 2007. Simply put, spending exceeded taxes by $162 billion for the year. The federal government borrowed the additional $162 billion from the public during 2007, which brought the balance of the national debt held by the public to slightly over $5 trillion by the end of the year.