November 5, 2010
This morning, CBO issued its Monthly Budget Review, which summarized the end-of-year budget results reported by the Treasury for fiscal year 2010. In that year, which ended on September 30, the federal government recorded a total budget deficit of $1.3 trillion, $122 billion less than the deficit incurred in 2009. The deficit fell as a share of the nation’s gross domestic product (GDP) from 10.0 percent in 2009 to 8.9 percent in 2010—the second-highest deficit as a share of GDP since 1945 and about four times the average deficit as a share of GDP recorded between 2005 and 2008.
The large deficits in 2009 and 2010 reflect a combination of factors: an imbalance between revenues and spending that predates the recent recession, sharply lower revenues and elevated spending associated with those economic conditions, and the costs of federal policies implemented in response to those conditions. Revenues in 2010 were 16 percent below the peak amount reached in fiscal year 2007 and only slightly above the amount collected in 2005. Total revenues in both 2009 and 2010 were 14.9 percent of GDP, the lowest share since 1950. In contrast, outlays in 2010 were 27 percent more than spending in 2007.
Receipts and Outlays
As a Percentage of GDP
Sources: Department of the Treasury; CBO
The deficit was smaller in 2010 than in 2009 because revenues increased and spending declined. Receipts in 2010 rose for the first time in three years, reaching $2,162 billion, up 3 percent from collections in 2009. Expenditures decreased by $64 billion (or 2 percent) from 2009 to 2010.
On the revenue side, corporate income tax receipts showed the largest gain in dollar terms from 2009 to 2010—$53 billion (or 38 percent). Despite the gain, those receipts were just over half as large as in 2007 and 37 percent below the amount collected in 2008. The gain in corporate income tax receipts can be attributed to higher taxable profits resulting from both improved economic conditions and the temporary lapse of provisions that allowed taxpayers to take higher depreciation charges in 2009. Receipts from the Federal Reserve also rose substantially, increasing by almost $42 billion to an amount more than double the 2009 receipts. The central bank’s increased profits resulted from an enlarged portfolio and a shift to riskier and thus higher-yielding investments.
Those gains in 2010 receipts were partially offset by declines in receipts from social insurance (payroll) taxes of $26 billion (or 3 percent) and individual income taxes of $17 billion (or 2 percent). Receipts during the first several months of the fiscal year were below those during the same period in 2009. But in the last five months of fiscal year 2010, collections of withheld and nonwithheld taxes, which were based on taxable incomes in 2010, were 4 percent higher than in the same period in 2009.
Spending related to the financial crisis dropped sharply in 2010. Net outlays recorded for the Troubled Asset Relief Program (TARP), federal deposit insurance, and Treasury payments to Fannie Mae and Freddie Mac were $367 billion lower in 2010 than in 2009. Conversely, spending associated with the American Recovery and Reinvestment Act (ARRA)&emdash;the stimulus bill&emdash;rose by approximately $110 billion to a total of roughly $225 billion.
Outlays for defense rose by 4.7 percent in 2010, lower than the previous year’s increase of 7.1 percent and about half the average annual growth rate of 8.8 percent over the past decade. The 3.4 percent rise in spending for procurement was markedly lower than recent double-digit growth, and spending on research and development declined by 2.6 percent—the first drop since 1999. Nearly one-quarter of military spending in 2010 was associated with operations in Iraq and Afghanistan—about the same portion as in 2008 and 2009, CBO estimates.
Outlays for the three largest entitlement programs—Social Security, Medicare, and Medicaid (not including spending from ARRA)—rose by 5.4 percent in 2010. That increase was smaller than the 7.0 percent average annual growth over the past five years. Nevertheless, Social Security outlays as a share of the economy grew for the fifth consecutive year, rising from 4.1 percent of GDP in 2006 to 4.8 percent of GDP in 2010. Spending for Medicare and Medicaid (excluding the effects of ARRA) represented 4.7 percent of GDP, compared with an annual average of 4.1 percent of GDP experienced over the past five years.
Payments for unemployment benefits were one-third greater in 2010 than in 2009. Those payments totaled $162 billion (or 1.1 percent of GDP), more than triple the amount paid in 2008. Spending for net interest on the public debt also increased to 1.6 percent of GDP, up from 1.4 percent of GDP in 2009. Spending on the wide variety of other federal programs accounted for about 30 percent of the budget and was equal to 7.2 percent of GDP, slightly more than spending in 2009 and the average over the past five years.