A recent AP article by Martin Crutsinger introduces and then answers the question "How did (the) $1 trillion deficit happen?" (see full AP article). Some highlights from the article include:

  • The government's annual budget deficit has topped $1 trillion. With three months left in the budget year, it will get even worse. The administration is projecting that the deficit will hit $1.84 trillion for the current budget year. This is four times the size of last year's budget deficit.
  • The deficit spending began with the 2001 recession, and got deeper with the 9-11 terrorist attacks as war spending started to ramp up.
  • Until 2008 the deficit had been shrinking, hitting a five-year low of $161.5 billion in 2007, but was followed by the record deficit of $454.8 billion in 2008 as the current recession and financial crisis hit.
  • The size of the deficit started to ramp up with the initial $700 billion TARP (about half spent in 2008, half in 2009), along with the recent $787 billion economic stimulus.
  • In addition to stimulus spending,"automatic stabilizers," such as food stamps and unemployment compensation, are also increasing. Government outlays are up 20.5% through the first nine months of this budget year.
  • All of this spending is occurring just as tax receipts are falling. Government revenues have fallen by 17.9% during the October-to-June period compared with one year ago.
  • While large in dollars, current deficits are still not the largest in terms of GDP, but are the largest outside of WWII. Currently, the CBO is forecasting the budget deficit will equal 13% of GDP. As a comparison, the deficit was 6% of GDP in 1983 as we moved out of another recession and ramped up cold war spending, and 30.3% of GDP in 1943 during World War II.
  • The CBO is projecting that the deficits will remain large for the foreseeable future, coming in at $1.43 trillion in 2010 and not falling below $633 billion over the next 10 years, ultimately adding $9.1 trillion to the national debt.
To tackle such deficits and debt, either spending needs to be curbed, or tax receipts need to increase - and quickly. Either way, the debt needs to be dealt with (see previous post), but the exit strategy will require hard choices (see Greenfaucet article). Given continued weakness in the economy, along with both health care reform and new global warming initiatives (such as carbon trading) on the docket, it does not appear that spending is going to slow down anytime soon (see previous post). The leaves tax increases on the wealthy and corporations, or additional tax cuts such as those recently targeted for the middle class. Expect the Supply Side - Keynesian debate to begin in earnest once again.


  1. S Benard // July 14, 2009 at 10:42 AM

    What leaps off the page at me in this list of facts wasn't the fact that this year's deficit will be 4 times the deficit of just last year (2008). I've heard that before! That figure alone boggles the mind, defying comprehension.
    What shocks my brain is the realization that this current year's deficit is 11.5 times that of just two years ago ($161.5 billion)! We've increased the deficit by a multiple of TEN in just two years? How can we do that -- and get away with it? I can't comprehend that!
    This year's deficit also is far more than all individual income tax revenues for the entire year. Imagine that! The deficit -- ALONE -- is more than the government's total individual income tax revenues for the entire year.
    This year's deficit is also now HALF of the entire budget! The interest alone is going to crush us!
    How can we keep this up without a train wreck? It defies explanation -- or justification, in my mind!

  2. Bull Bear Trader // July 14, 2009 at 12:02 PM

    Yes. You cannot get there by just taxing the wealthy, which itself is a moving target. Something has to give on the spending and/or tax side.