Worst Federal
Budget Outlook Ever
http://www.americansforprosperity.org/010809-worst-federal-budget-outlook-ever
Thursday, January 8th 2009
Phil Kerpen
January 7, 2008
Short of wartime
mobilization, it’s no exaggeration. The Congressional Budget Office released
its latest Budget and
Economic Outlook today, and it looks like the credit collapse and
attendant bailout mania are taking an even greater toll on the federal fisc than expected. Undercounting the TARP (CBO included
only $180 billion of its cost) and not including expected big-ticket stimulus
legislation, CBO projects a 2009 deficit of $1.186 trillion dollars, or 8.3
percent of GDP. Since 1930 (the earliest data I
have) there have only been four years when the deficit was greater
than 8.3 percent of GDP and they were the World War II years of 1942 through
1945, when the federal government was selling war bonds to defeat Nazism and
Japanese imperialism.
This staggering
deficit is almost entirely a consequence of skyrocketing federal spending, not
of falling revenues due to the financial crisis. Revenues are projected to fall
$166 billion dollars from 2008 to 2009—an otherwise large number that looks
puny in this context. Spending, on the other hand, is on course to jump by $570
billion this year, or 36 percent. As a percentage of GDP, federal spending will
set a new record of 24.9 percent (only exceeded in the same four World War II
years of 1942 to 1945).
If that’s not
daunting enough, bear in mind that it’s a big time lowball. To start with, the
TARP law required CBO to score expenditures under the program on a net-present
value basis, which means they are supposed to estimate how much all the
preferred shares that Treasury Secretary Hank Paulson has been buying up are really
worth, subtract that from what he paid for them, and record that as the cost to
taxpayers. That’s how they got the $180 billion figure, and it’s the procedure
the TARP law required them to use. But we really have no idea what these assets
are worth, and from a cash-flow perspective, the full purchase price is what’s
headed out the door. With about $220 billion of TARP funds having left the
building before 2008 ended, that means the real outlays for TARP in 2009 will
be about $480 billion, or $300 billion more than the CBO baseline includes.
That’s takes the
deficit from $1.2 trillion to $1.5 trillion.
Then there’s the
matter of the fiscal stimulus bill, an unprecedented hodge-podge of
big-government spending programs and tax subsidies, including billions in
so-called rebate checks to people who paid no taxes in the first place.
President-elect Obama has proposed a stimulus plan of
$775 billion, but acknowledged
today that it could end up being as much at $1.3 trillion. However
it develops, and even if it’s split between this year and next year, it’s safe
to predict that we’re looking at a 2009 deficit upwards of $2 trillion.
A $2 trillion
deficit is staggering to contemplate. For some perspective, consider that the
first time the federal government ever spent a total of $2 trillion in a year
was 2002, just 7 years ago. As a percentage of GDP, a $2 trillion deficit will
be about 14 percent of the CBO’s estimate of $14.2
trillion. If the economy deteriorates further, which is possible, the deficit
could go even higher. That’s well more than double the largest deficit
we’ve ever seen outside of World War II, which was 6 percent of GDP in 1983.
Proponents of even
bigger spending and taking on more debt will tell us that all is well. This is
a different economy; bigger and better government spending will prevent the
worst of our economic woes. Interest rates are at historic lows, so we should
borrow as much now as we can and spend our way back to prosperity.
The unfortunate
reality is that borrow and spend is precisely the problem in our financial
crisis, not the solution. American households and governments have been on a
leveraged spending binge, financing huge consumption expenditures with debt
that must eventually be repaid. Not all debt is created equal. Taking on debt
to invest in production makes sense, because the wealth produced can pay off
the debt and then some. Taking on debt to spend on consumption just sets up a
day of reckoning because the debt has to be repaid from future income.
As the world
viciously deleverages, the one thing keeping the U.S. afloat and
those interest rates low is that we look like the least-bad place to put
capital. Eventually the staggering debt we’re running (not to mention the
off-balance sheet obligations of programs like Social Security and Medicare,
slated, by the way, for an 8 percent spending increase in 2009) will have to be
repaid. That means steeply higher taxes or the monetization of debt—which we’re
already seeing via Federal Reserve action—triggering hyperinflation.
The only way the
federal government could actually limit the impending carnage would be to
aggressively cut key supply-side tax rates, removing the barriers to formation
and efficient allocation of capital like the corporate tax, the capital gains
tax, and the death tax. Big supply-side tax cuts would facilitate investment in
the economy’s productive capacity, creating more wealth to pay down the debt on
household, corporate, and government balance sheets. Supply-side tax cuts would
therefore be less damaging to the federal budget outlook than the current
so-called stimulus plans.
Unfortunately,
given political reality, 2009’s reign as the worst budget year ever might only
last until next year.
Mr.
Kerpen is director of policy for Americans for
Prosperity.