HEADLINES

Thursday, October 7, 2010

The Federal Budget Deficit for 2010—Nearly $1.3 Trillion

The federal government's fiscal year 2010 has come to a close, and CBO estimates, in its latest Monthly Budget Review, that the federal budget deficit for the year was slightly less than $1.3 trillion, $125 billion less than the shortfall recorded in 2009. Relative to the size of the economy, the 2010 deficit was the second-highest shortfall—and 2009 the highest—since 1945. The 2010 deficit was equal to 8.9 percent of gross domestic product (GDP), CBO estimates, down from 10.0 percent in 2009 (based on the most current estimate of GDP). CBO's deficit estimate is based on data from the Daily Treasury Statements and CBO's projections; the Treasury Department will report the actual deficit for fiscal year 2010 later this month.

The estimated deficit is about $50 billion less than CBO projected in its August Budget and Economic Outlook. Outlays turned out to be lower and revenues higher than CBO anticipated.

Outlays

Outlays ended the year about 2 percent below those in 2009, CBO estimates. That decline resulted primarily from a net reduction in outlays for three items related to the financial crisis: the costs of the TARP ($262 billion lower than in 2009), payments to Fannie Mae and Freddie Mac ($51 billion lower), and federal deposit insurance ($55 billion lower). Excluding those three programs, spending rose by about 9 percent in 2010, somewhat faster than in recent years.

Payments for unemployment benefits rose by 34 percent in 2010 because of high unemployment and increased benefits provided by various laws, including the American Recovery and Reinvestment Act (ARRA). Other ARRA provisions led to double-digit growth in spending for a number of programs—particularly the State Fiscal Stabilization Fund, refundable tax credits, and certain education programs. In contrast, defense spending grew more slowly than in recent years, increasing by about 5 percent in 2010 after rising by an average of 8 percent annually from 2005 through 2009. Medicare and Social Security outlays rose by about 5 percent this year, somewhat less than in most recent years. The 9 percent increase in Medicaid outlays partly reflects a temporary increase in the federal share of Medicaid assistance authorized in ARRA; excluding ARRA-related expenditures, Medicaid outlays rose by about 6 percent.

Receipts

CBO estimates that total receipts rose by 3 percent in 2010, following declines in each of the prior two years. Growth in receipts of corporate income taxes and remittances from the Federal Reserve more than offset reduced collections of individual income and payroll taxes in 2010.

Corporate income tax receipts rose by $53 billion (or 39 percent) in 2010; improved economic conditions and the expiration of legislation that allowed taxpayers to take higher depreciation charges in 2009 has resulted in higher taxable profits in 2010. Receipts from the Federal Reserve increased by $42 billion this year, to more than double the amount received in 2009. The central bank's increased profits resulted from an enlarged portfolio and a shift to riskier and thus higher-yielding investments in support of the housing market and the broader economy.

Those increases were partially offset by a drop in the total of individual income and payroll taxes, which were about $43 billion (or 2 percent) less than those receipts in 2009. That result occurred primarily because withheld income and payroll taxes declined by about $13 billion (or 1 percent), and nonwithheld receipts fell by about $35 billion (or 10 percent). In both instances, the declines occurred early in the fiscal year and were largely attributable to lower collections of tax liabilities incurred in 2009. Collections of income and payroll taxes in the past five months are 4 percent above the amounts collected during the same period in 2009.

The Monthly Budget Review was prepared by Elizabeth Cove Delisle and Daniel Hoople of CBO's Budget Analysis Division, and by Barbara Edwards and Joshua Shakin of our Tax Analysis Division.
 








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