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The federal budget deficit has worsened over the past year as the economy collapsed into recession, Congress once again patched the alternative minimum tax (AMT), and the Treasury took steps to stabilize credit markets and rejuvenate the economy. Red ink drenches the federal budget for the foreseeable future.
How bad is the budget situation? In its annual ten-year budget forecast last January, the Congressional Budget Office projected an improving fiscal situation that would generate a cumulative $274 billion budget surplus over the subsequent decade (see first graph). The budget would move from deficit to surplus in 2012, primarily because, under CBO’s mandated assumption that current law would play out, the Bush tax cuts would expire, the AMT would snag growing numbers of taxpayers, and revenues would surge.
Eight months later, CBO’s September update projected both falling revenues—especially corporate income taxes—and higher spending that spell budget deficits for the next ten years. The cumulative surplus had turned into a $2.3 trillion deficit, CBO said, even if Congress allowed the Bush tax cuts to lapse (see second graph).
But Congress and both presidential candidates asserted that the Bush tax cuts would not disappear entirely—though the candidates disagreed on how much of the cuts would continue. Nor would they allow an unpatched AMT to add to the tax burdens of millions of taxpayers. If Congress followed that course and extended both the Bush tax cuts and the AMT patch, CBO said, the ten-year budget deficit would more than triple to $7.4 trillion (see third graph).
And the bad news doesn’t end there. The Troubled Assets Relief Program (TARP) will boost 2009 outlays by as much as $700 billion. The cost of unemployment benefits will climb with rising job losses and last month’s extension of benefits. And Congress and the administration are working to bail out troubled mortgages and the auto industry. CBO estimates that the budget deficit for just the first two months of 2009 totaled $267 billion—and that’s assuming government can recoup a big chunk of TARP funds. Counting actual government outlays in October and November, the two-month deficit hit an astounding $408 billion. And President-elect Obama’s proposed economic stimulus would include aid to states and localities, investment in infrastructure, and increased benefits to the tune of $500 billion or more.
We don’t know where the red ink will end; we know only that it will flow freely throughout this year and probably next. Fiscal responsibility is likely to wait until the economy regains its footing, but it's not too early to start thinking about how to reverse the disastrous long-term trend of ballooning deficits.
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