October Monthly Budget Review

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October 7, 2009

CBO estimates, in its latestMonthly Budget Review, that the federal budget deficit was about $1.4 trillion in fiscal year 2009, nearly $1 trillion greater than the shortfall recorded in 2008. Relative to the size of the economy, the 2009 deficit was equal to 9.9 percent of GDP (the highest since 1945), compared with 3.2 percent in 2008. As shown in the table below, both lower revenues and increased spending contributed to the growth in the deficit. Revenues fell by almost $420 billion (or 17 percent) below receipts in 2008. Total revenues in 2009 were about 15 percent of GDP, the lowest level in over 50 years. Conversely, outlays increased by over $530 billion (or 18 percent) in 2009, to nearly 25 percent of GDP, the highest level in over 50 years.

The estimated deficit is very close to the shortfall CBO projected in its August budget outlook report. In that report, CBO forecast a deficit of $1,587 billon if Fannie Mae and Freddie Mac were included in the budget as federal entities---or $1,409 billion if they were treated as nonfederal entities and only the net payments to them from the Treasury were counted in the budget. The Monthly Treasury Statements (and the figures shown in CBOs Monthly Budget Review) reflect the latter treatment.

Nearly 60 percent of the growth in spending for programs and activities other than net interest on the public debt resulted from three sources: spending for the Troubled Asset Relief Program ($154 billion), Fannie Mae and Freddie Mac ($91 billion), and the stimulus bill, the American Recovery and Reinvestment Act of 2009 (ARRA--over $100 billion). Other federal spending was up by about 9 percent, compared with the 7 percent average growth in outlays over the past five years. Payments for net interest on the public debt decreased by $60 billion in 2009, somewhat mitigating other increases in spending. That decline is due mainly to lower short-term interest rates and lower costs for inflation-indexed securities.

Excluding the effects of ARRA, spending for unemployment benefits more than doubled in 2009, because of rising unemployment and benefit increases. Spending for Medicare rose by 10 percent; outlays for Medicaid (excluding ARRA) and Social Security benefits grew by 9 percent. Defense spending increased by 7 percent in 2009, CBO estimates, lower than the average growth rate of over 9 percent during the past decade.

Individual income taxes, the largest source of tax receipts, account for over half of the total drop in receipts, declining by $230 billion (or 20 percent). Corporate tax receipts fell for the second consecutive year, decreasing by about $166 billion (or 54 percent). Receipts of social insurance taxes fell by about $9 billion (or 1 percent). The decrease in individual income and social insurance taxes is the result of declines both in withholding for individual income and payroll taxes and in payments made directly by individuals. Withholding began to fall markedly in December, with the weakening economy and low year-end bonuses and fell further as a result of tax reductions in ARRA.