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Several factors combined to cause a historic deficit

Tue., July 14, 2009

Here are some questions and answers about what happened to the federal budget, and how we got to a $1 trillion deficit.

Q. Just how did we go from a string of four consecutive surpluses from 1998 through 2001 to the fix we are in now?

A. The surpluses at the end of the last decade reflected a boom-time economy, which was enjoying the longest uninterrupted expansion in U.S. history.

When the last recession began in 2001, it cut into revenues. Then the government’s budget picture darkened even further after the 2001 terrorist attacks as government spending was increased to pay for wars in Afghanistan and Iraq.

Q. But weren’t things getting better at the end of the Bush administration?

A. Until President George W. Bush’s last year in office, the deficit had been shrinking, hitting a five-year low of $161.5 billion in 2007. But that was followed by the record deficit of $454.8 billion in 2008, the budget year that ended on Sept. 30 of last year.

Two things happened to make the deficit balloon: The country was hit by a severe recession that began in December 2007, and then those troubles were compounded by the worst financial crisis in seven decades, which struck in the fall of 2008.

Q. Is that all that is going on with the deficit?

A. Unfortunately, no. Government spending is being driven higher not only by the financial bailouts and the stimulus spending but also by what economists call “automatic stabilizers.” That is spending that automatically occurs in times of economic troubles to help cushion the shock of a downturn.

The government is spending billions of dollars more on these expenditures – such things as food stamps and unemployment compensation for the millions of workers who have lost their jobs.

In all, government outlays are up 20.5 percent through the first nine months of this budget year compared to the same period a year ago.

Q. Does that explain all the red ink?

A. No. There is another factor at work: Government revenues have fallen by 17.9 percent in the October-to-June period compared with a year ago. That reflects the severity of the current recession, which is one of the deepest in decades and the longest downturn in the post-World War II period. That has meant millions of people losing their jobs – and thus not paying payroll taxes into the government’s coffers – and a big drop in corporate tax collections.

Q. How does this year’s projected deficit rank with other periods in history?

A. Without a doubt, it will be the largest in dollar terms, but it won’t be a record in relation to the overall economy – the comparison preferred by economists.

The Congressional Budget Office is forecasting that the budget deficit for this year, using the administration’s spending assumptions, will equal 13 percent of the total economy, as measured by the gross domestic product – a measure of the value of all goods and services produced in the U.S.

While that would surpass the record of recent years – 6 percent of GDP, achieved in 1983, during the Reagan administration – it is far below the 1943 deficit, which was 30.3 percent of GDP. That deficit reflected the massive spending underetaken to fight World War II.

Q. What is the deficit outlook going forward?

A. That is where the real problems may come. Economists say it is OK to run massive deficits now to stabilize the banking system and get the economy growing again. But they are fearful that the administration and Congress will not do enough to get future deficits under control, despite Obama’s pledge to cut the deficit in half by the end of his first term in office.

Q. What do private economists forecast?

A. They have equally grim forecasts and they warn that these projections underscore the need for the administration to get more serious about attacking future deficits once the current economic crisis is past. They argue that the only way that can be done is through some combination of spending cuts, especially in the government’s big entitlement programs, and tax increases.

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