What caused this year's deficit?
Hint: It wasn't an Obama 'spending binge'
The federal budget deficit will again exceed $1 trillion this fiscal year, the Congressional Budget Office reported last week. That news is sure to trigger another round of condemnations from politicians and pundits who have a political or ideological interest in pinning these deficits on the domestic spending policies of President Barack Obama.
Unfortunately for them, today's report—along with dozens of other similar CBO reports in recent years—actually proves the opposite—that the current deficit is overwhelmingly the result of two factors: events that occurred before President Obama took office and tax cuts.
In fact, higher spending under Obama accounts for less than 20 percent of this year's deficit, and nearly half of that was additional defense spending—not domestic spending. Bottom line: The narrative that an "Obama spending spree" caused our deficit problem is utterly false.
From surplus to deficit
In January 2007, the Congressional Budget Office estimated that the federal government this year would be running a surplus of $170 billion, or about 1 percent of gross domestic product. We know now that this year's budget will actually be in the red by a little over $1 trillion, or 7 percent of GDP.
So what went wrong? A close look at how the CBO's estimate of the 2012 budget changed over the past five years reveals precisely how it came to be that we went from a projected surplus to a massive deficit.
By the time Obama took office in January 2009, the budget projection for 2012 had already deteriorated dramatically. By inauguration, the CBO was projecting a 2012 deficit of $264 billion. In other words, the projected surplus was already gone by the time Obama set foot in the Oval Office.
Most of that swing from surplus to deficit was the result of the Great Recession's onset. Between September of 2008 and January of 2009 alone, economic conditions prompted the CBO to revise estimates of 2012 revenue collections downward by over $240 billion.
Increased spending prior to 2009—especially on the wars in Afghanistan and Iraq—also contributed to this year's deficit, to the tune of $153 billion. That's because higher spending in 2007 and 2008, mostly relating to overseas military operations, caused the CBO to adjust its assumptions to more realistically project similar spending in 2012.
All told, 35 percent of the swing from a $170 billon projected surplus to a $1.079 billion deficit is directly attributable to events that preceded the current president's term.
The remainder of the deterioration did happen after 2009, but higher spending wasn't even close to the main culprit. The real problem was lower-than-expected revenues.
In January 2009, the CBO forecast 2012 revenues at $3.1 trillion. Today, the CBO expects that this year's revenue will be just $2.5 trillion, a nearly $600 billion difference. That revenue decline accounts for fully 48 percent of the swing from projected surplus to current deficit.
And while some of that decline has to do with continued economic weakness, the majority of it, about $335 billion, is the direct result of the tax cut deal signed into law in December 2010. That deal, which extended all of the Bush tax cuts, even those that exclusively benefit the very wealthy, is the legislative factor by far most responsible for this year's deficit.
Together, events that occurred before January 2009 and the precipitous decline in tax revenues account for about 83 percent of the difference between what the 2012 deficit actually is and what it was expected to be five years ago. The other 17 percent, approximately $115 billion, is the result of higher-than-expected spending.
And of that $115 billion, about $100 billion came from increased defense spending.
In May of 2009, Congress passed and the president signed the Supplemental Appropriations Act of 2009, which included $80 billion for operations in Iraq and Afghanistan. It had been the Bush administration's custom to fund the wars through those types of "supplemental" bills. By doing it that way, CBO projections only intermittently included the future costs of those overseas military operations.
When Obama signed the 2009 supplemental into law, it caused the CBO to increase its projections of military spending, not only for 2009, but for all future years, including 2012. CBO's post-supplemental projection of defense spending for 2012, released in August 2009, turns out to have been relatively accurate. It expected 2012 defense spending of about $700 billion. The current CBO expectation is that defense spending will amount to $708 billion.
With over 90 percent of the 2012 deficit already spoken for—35 percent from events prior to 2009, 48 percent from lower tax revenue, and 8 percent from higher defense spending—that leaves higher nondefense spending responsible for just 9 percent.
That's right, just 9 percent of this year's deficit comes from higher nondefense spending. And most of that spending is recession-related: the last vestiges of the American Recovery and Reinvestment Act and higher-than-normal unemployment insurance payments.
The real culprit: Low revenues
Not only do these numbers debunk the notion that the deficit is the result of some kind of "spending binge," but they also help us understand the real challenges we face in trying to bring that deficit down.
Tea Party conservatives are keen to have the public believe that the deficit is a spending problem and not a revenue problem, but that is plainly false. Since 2007, fully 70 percent of the swing from projected surplus to trillion-dollar deficit derives from lower-than-expected revenues. If we misdiagnose the problem, we will never cure the disease.
This article was published by the Center for American Progress.
Michael Linden is the Associate Director for Tax and Budget Policy at American Progress.