Wednesday, October 08, 2008

U.S. Federal Deficit Reach New High

The Congressional Budget Office yesterday released its preliminary budget data for September and therefore also for fiscal year 2008 since that ended in September. The numbers show that the deficit reached a new all time high in dollar terms of $438 billion (although it was well below the highs of the early 1980s as a percentage of GDP), up from $162 billion in fiscal year 2007. The increase in the gross debt was more than twice that because of the increase in debt held by government agencies.

This reflected both falling revenues as a result of the weaker economy and the so-called tax rebates but also soaring spending. Calendar adjusted spending rose 8.3%, far above nominal GDP growth of 4% (and even slower growth of national income). As a result, federal government spending as a percentage of GDP will likely reach 20.8%, the highest level since 1994. And even this really underestimate how high spending has become because first of all GDP might be overestimated and secondly because the cost of interest payment has been held down by falling interest rates. Accounting for that spending may be at an all time high.

For fiscal 2009, it seems almost certain that spending will increase further. Not only is that what typically happens during downturns, but perhaps even more importantly because of the cost of the bailouts and probably also because of some new "stimulus package" enacted by President Obama and the Democratic Congress. The only spending post likely to be contained will be interest payments. While the higher debt would perhaps make some believe that they will rise, this effect will be more than cancelled out by the lower interest rates.

Meanwhile, revenues will continue to decline (and decline even faster than in fiscal 2008) because of the economic slump and perhaps also because of "tax credits" in the likely "stimulus package".

As a result of falling revenues and soaring spending, the deficit will probably rise sharply in the next fiscal year. This will be very convenient for the additional bailout schemes that will likely come, where part of the strategy will likely be to exchange Treasuries for Mortgage backed securities and other assets perceived risky.


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