WHERE DID A $9 TRILLION BUDGET DEFICIT COME FROM?

Current Congressional Budget Office (CBO) and Office of Management and Budget
(OMB) projected deficits of $1.58 trillion for FY2009 (11.9% of gross domestic product
(GDP) for fiscal year 2009)1 and $9.0 trillion (this includes the FY2009 deficit) over the
10-year period, FY2009-2018, are overwhelmingly a result of the current economic
contraction and policies put in place prior to FY2009.

An economic downturn will automatically create deficits because job loss and income
declines reduce tax revenue, and because they create more demand for public serv-
ices such as unemployment insurance, nutrition assistance, increased Medicaid
spending and federal subsidy costs for Fannie Mae and Freddie Mac. These factors
add up to just under half of the decline in the budget outlook (about 45%) since pre-
recession forecasts. As a result of the current recession and tax cuts enacted over the
last eight years, federal revenue in FY2009 will be the lowest since FY1950.

Policies enacted prior to the current fiscal year represent nearly 21% of the deteriora-
tion that occurred since FY2001. [Note: In FY2001, the federal budget was in surplus
by $281 billion (2.8% of GDP). Further, the CBO estimated surpluses would continue
through 2010 in their baseline projection.] Tax changes from the FY2001-03 period as
well as unpaid-for spending increases, including spending on the Global War on Ter-
ror (GWOT: wars in Iraq and Afghanistan, etc.) represent the majority of these costs.

Troubled Assets Rescue Program (TARP) from late FY2008 accounts for about 22% of
the projected budget deficits.

The American Recovery and Reinvestment Act (ARRA) has added about 12% to the
deterioration of the FY2009-2018 budget outlook since the start of the recession.

All together financial industry rescue and economic stimulus policies, enacted in late
FY2008 and early FY2009 to soften the economic impacts of the FY2007-FY2009 reces-
sion represent about 51.4% of the total projected federal deficits. Best estimates are
that these allocations of the federal budget have saved the loss of between 700,000-
800,000 jobs during FY2009-2011 and prevented a repeat of the Great Depression
where in today’s world as many as 20 million additional Americans would have been
out of work than otherwise.2

Only a small fraction of the deficit increase since FY2001 is due to increased spending
and even a smaller share is due to policy changes since the start of FY2009 that are
unrelated to the recession. 3

1“On a comparable basis, federal debt hit 109 percent of GDP at the end of World War II, and
hit a second peak of 49 percent at the end of the Reagan-Bush years. And a number of Euro-
pean countries have hit substantially higher debt levels without crisis.” See:
http://krugman.blogs.nytimes.com/2009/08/25/deficits-debt-and-the-economy/

2“OMB has unemployment still at 9.7% at the end of 2010; still at 8% at the end of 2011. These
numbers cry out for a more aggressive economic policy.” See:
http://krugman.blogs.nytimes.com/2009/08/25/deficits-debt-and-the-economy/

3Numbers taken from analyses by John Irons, Economic Policy Institute, Washington, DC. See:
http://www.epi.org/analysis_and_opinion/entry/roots_of_deficit_pre-date_obama/;
http://www.epi.org/publications/entry/ib262/

LYLE A. BRECHT 410.963.8680 DRAFT 1.1 CAPITAL MARKETS RESEARCH --- Wednesday, October 7, 2009 Page 1 of 1