Saturday, January 10, 2009

Obama Deficit May Exceed $1.5 Trillion

The Congressional Budget Office forecasted the other day that the U.S. federal deficit will rise as high as $1.2 trillion. And that forecast rests on the assumption that no "stimulus package" will be implemented. Add the package of $775 billion over 2 years, which translates into $387.5 billion per year, and the deficit will exceed $1.5 trillion.

Note also that this $1.2 trillion figure rests on the assumption that much of the TARP (aka Wall Street and Detroit bailouts) outlays should not be counted as "costs" but "investments". That is not necessarily an invalid approach as it is unlikely that all assets acquired through TARP will be completely worthless, but their estimate of the value of those assets are probably over-optimistic and this means that there is not a case for arguing that these deficit numbers are exaggerated.

The numbers for the first 3 months of fiscal 2009, the fourth quarter of the calendar year 2008, confirms that even without the stimulus package, the deficit will rise well above a trillion dollar. Tax revenues fell nearly 10%, from $606 billion to $548 billion, while spending rose roughly 45%, from $713 billion to $1,032 billion, causing the "cash based" deficit to rise from $107 billion to $485 billion. Bailout spending were $259 billion, of which the CBO claims $182 billion should be regarded as "investments" and the remaining $77 billion as costs. Even accepting that optimistic assumption we're still talking about an increase in the deficit of nearly $200 billion in just 3 months, which would translate into a 12 month increase of $800 billion. With the slump deepening, this underlying increase will likely accelerate, but on the other hand the inclusion of the tax rebate in the year ago numbers will limit the increase. Add that to the fiscal 2008 deficit of $455 billion, and you end up with a deficit of over $1.2 trillion.

The biggest decline in revenues comes from corporate income taxes, which saw a decline of nearly 45%. That suggest that corporate profits are collapsing. But other sources of revenues, including payroll taxes and personal income taxes also declined, reflecting the deep economic contraction. Meanwhile, government spending excluding interest payments and bailouts boomed like never before, rising as much as 12%. Jobless benefits and other hand-outs increased most dramatically, but military and Medicare spending also showed double digit increases. In addition to that were as mentioned before the new spending category of bailouts. The one spending post that showed a decline, and a quite dramatic (27.6%) one, was interest payments. One might have expected interest payments to rise given how dramatically the level of federal debt is increasing, but this effect is more than off-set by the even more dramatic decline in interest rates on government securities, particularly short-term securities.

It is thus now a foregone conclusion that the deficit will rise above a trillion dollar, and well above a trillion dollar. And it is looking increasingly likely that it will rise above $1.5 trillion, or more than 10% of GDP (the highest since World War II), even if you do not include all outlays for TARP.


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