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  From last wks



The Economic Crisis and the Fiscal Crisis: 2009 and Beyond

Alan J. Auerbach, William G. Gale

Published: February 19, 2009
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In 2009, the federal deficit will be larger as a share of the economy than at any time since the 1940s. After 2009, we project an average deficit of $1 trillion per year for the next 10 years, under optimistic assumptions. The longer-run picture is even bleaker, with a fiscal gap of 7-9 percent of GDP -- between $1 trillion and $1.3 trillion annually in current dollars. Recent trends in credit default swap markets suggest that although fiscal policy problems are usually described as medium- and long-term issues, these problems may be upon us much sooner than previously expected.


With the economy mired in the deepest recession in decades a drop in economic activity that has been compounded by continuing mortgage defaults, a historic decline in housing prices, falling equity values, illiquid credit markets, declining consumer confidence, and enormous and rapid job losses attention has shifted away from problems of fiscal balance. However, the most recent Congressional Budget Office baseline projection (2009a) reports a fiscal year 2009 deficit of $1,186 billion, or 8.3 percent of GDP, under the assumption that no new tax or spending policies are implemented. Including the recently enacted $787 billion stimulus package raises the 2009 deficit by roughly $185 billion (CBO 2009b). Either the baseline projection or the baseline-plus-stimulus would represent the largest deficit in dollar terms and as a share of the economy since World War II, as well as a stunning shift from the budget surpluses of a decade ago.

This paper discusses the impact of recent tumultuous economic events and policy interventions on the Federal fiscal picture for the immediate future and for the longer run. Because these events and policies are still unfolding rapidly, the paper will be updated over the next few weeks and months. This version of the paper includes estimates of the effects of the stimulus package, but does not contain any policy estimates related to Secretary Geithner's outline of a financial bailout on February 10 or President Obama's outline of a housing package on February 17. We will revise the estimates at various times following the clarification of those proposals, the budget summit the Administration has scheduled for February 23, the release of the Administration's budget proposals scheduled for February 26, and the update of CBO's economic projections in March. (Revisions will be posted at

(End of excerpt. The entire report is available in PDF format.)