Federal Deficit Hits $1.3 Trillion…and Counting

Kurt Brouwer August 8th, 2009

The Congressional Budget Office (CBO) put out its estimate of the Federal budget deficit for the current year (10 months) through July [emphasis added]:

Monthly Budget Review (Congressional Budget Office, August 6, 2009)

The federal budget deficit for the first 10 months of fiscal year 2009 reached $1.3 trillion, CBO estimates, close to $880 billion greater than the deficit recorded through July 2008. Outlays rose by almost $530 billion (or 21 percent) and revenues fell by more than $350 billion (or 17 percent) compared with the amounts recorded during the same period last year. The estimated deficit reflects outlays of $169 billion for the Troubled Asset Relief Program (TARP), recorded on a net-present-value basis adjusted for market risk…

The budget deficit last year was high, but we are beating it by $880 billion.  Oh joy.

The CBO suggests that this estimate understates things because it just includes payments to Fannie Mae and Freddie Mac and does not include their total operations, which are horrendous money sinks.

For example,  Zero Hedge has been reading Fannie Mae’s Second Quarter Supplement, which provides a breakdown of troubled loans suggesting that Fannie Mae loan has nearly $1 trillion in troubled loans.  Who knows how much more Freddie Mac would add? Zero Hedge reports [emphasis added]:

…The report describes FNM’s exposure to problematic classes of mortgages on their book. That total comes to a whopping .9 Trillion. The total book of business is $2.7 Trillion, fully 32% of their book is troubled...

CBO writes this about the hit we are taking from Fannie Mae and Freddie Mac.  The budget deficit estimate:

…includes net cash payments of $83 billion in support of Fannie Mae and Freddie Mac, although CBO believes that those two entities should be considered federal operations and that the full scope of their activities should be incorporated in the budget in a manner similar to the TARP. CBO estimates that spending increases and revenue reductions stemming from the American Recovery and Reinvestment Act of 2009 (ARRA) have totaled more than $125 billion so far this year (excluding the impact on the budget from the effects that the legislation has had on the economy)…

So, this budget deficit estimate probably underestimates the actual deficit we are incurring.  Additional problem areas exist too.  For example, the Federal government has taken on an increasing role in funding unemployment benefits (which are up sharply) and Medicaid spending (also up sharply) that normally would be picked up by the states.

CBO continues:

…Outlays topped $3.0 trillion for the first 10 months of the fiscal year, growing by 21 percent compared with outlays through July of last year-or if the estimate is adjusted to reflect the shifts in payment dates, by 20 percent. Payments for the TARP and net cash disbursements for Fannie Mae and Freddie Mac account for nearly half (or $252 billion) of the increase over last year.

Spending for unemployment benefits is more than 2½ times what was spent in the first 10 months of 2008 because of higher unemployment and legislation that increased the amount and duration of benefits. Federal spending for health care has also grown rapidly. Medicaid spending grew by 24 percent, largely because of a provision in ARRA that temporarily increases the share of Medicaid costs paid for by the federal government…

So, we are in record territory here, both in terms of budget deficits and in terms of total spending.  For example, spending has already topped $3 trillion and there are still two months to go. The higher spending tab for unemployment and Medicaid is currently a subject of dispute with governors of many states.  The Feds are picking up the tab now, but they want states to begin doing so.  Unfortunately, the states are generally broke also, with California, Michigan, New York leading the way.

See also:

Tax Revenues Plummet…Again

Crackpot Economics & Cash For Clunkers

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