Nearly Half a Trillion in the Red in Just Three Months
January 13th, 2009 . by economistmomThere’s news from the Treasury Department today (monthly Treasury statement) on the federal budget deficit for the first quarter of fiscal year 2009 (i.e., 4th quarter of calendar year 2008). I guess this is what a year headed for a (way?-)more-than-a-trillion-dollars deficit looks like; AP reports:
The federal government already has run up a record deficit of $485.2 billion in just the first three months of the current budget year, the Treasury Department said Tuesday.
The deficit is on track to surpass $1 trillion for all of fiscal 2009 and some economists believe it could go much higher.
The deficit for December totaled $83.6 billion, a sharp deterioration from a year ago when the government managed a surplus of $48.3 billion…
All the red ink is occurring because of the massive spending on the $700 billion financial rescue program and a prolonged recession which has depressed tax revenues.
The imbalance from October through December is the highest on record for a first quarter and surpasses the mark for a full budget year of $454.8 billion set last year.
The Congressional Budget Office last week projected that the deficit for this fiscal year will hit $1.2 trillion…not includ[ing] any of the costs from the economic stimulus program that President-elect Barack Obama is hoping Congress will pass in the next few weeks…
The red ink through December includes $247 billion that has been spent on the $700 billion financial rescue program [TARP]…
Yet, as this CNN-Money story points out, despite the ballooning federal debt, interest payments are actually down from a year ago because interest rates are now so low:
According to the report, Treasury also paid nearly $43.5 billion in interest on its outstanding debt in the first quarter of the fiscal year, down from nearly $58 billion paid during the same period a year ago, reflecting the dramatic drop in interest rates on Treasury bonds.
Treasury has been issuing bonds at a record pace in the past few months to pay for its massive bailout programs. Although the Treasury adds to the deficit whenever it issues bonds, that issuance has come cheap recently as interest rates have plummeted to record lows.
Can/will those interest rates stay low as the debt continues to rise at a pace just around $1 trillion per year? No. Just look at the CBO report, which shows (Table 2, pg. 12) that although short-term interest rates are forecast to remain in the zero-to-one percent range for 2009 and 2010, they are expected to rise to the 4-to-5 percent range by the latter half of the ten-year budget window. Even under the current-law baseline with no extension of any of the tax cuts, annual net interest payments double in just five years–from $195 billion (1.4 percent of GDP) in fiscal year 2009, to $392 billion (2.2 percent of GDP) in fiscal year 2014. (And under Concord’s more realistic, policy-extended baseline, net interest in fiscal year 2014 reaches $479 billion–i.e., in nominal dollar terms, coincidentally exceeding the magnitude of last fiscal year’s (”previous record”) deficit.)
Though finance costs are down this is really a temporal effect of unknown durration. As some point if/when rates increase the roll-over costs for all outstanding debt will be impacted.
PS the comment was meant to start - “I agree, …”
(And under Concord’s more realistic, policy-extended baseline, net interest in fiscal year 2014 reaches $479 billion–i.e., in nominal dollar terms, coincidentally exceeding the magnitude of last fiscal year’s (”previous record”) deficit.)
Diane,
I also agree that interests costs are going to rise significantly. However, I had another question regarding last fiscal year’s (”previous record”) deficit. Table 5 on page 16 of the CBO Report shows the 2008 deficit to have been $455 billion and the on-budget deficit (which excludes the Social Security surplus) to have been $638 billion. Also, table 6 on page 19 shows the gross federal debt at the end of 2008 to have been $9986 billion. This latter value is $1035 billion more than the $8951 figure given for the debt at the end of 2007 in the prior year’s CBO Report and the prior budget. My question is where did the additional $397 billion ($1035 - $638 billion) come from? The usual source is surpluses run by other trust funds but this has recently been in the $100 billion area.
I wonder if there was some additional borrowing from some government entity that didn’t show up in the deficit. This could explain other strange things in the data such as the fact that Table 6 shows the gross federal debt growing by just $26 billion in 2018 despite the fact that Table 5 shows a projected on-budget deficit of $342 billion for that year. Perhaps this represents a repayment of this additional off-budget loan? This may be explained in the budget that comes out next month. However, I thought I’d ask in case you were already aware of the cause of the discrepancy. Thanks.
B Davis: the discrepancy between the addition to the debt and the deficit has to do with how the cost of programs such as TARP and the Fannie/Freddie takeover are accounted for. The deficit effect is not based on the actual cash flow of Treasury debt in these cases, but based on better estimates of the implicit subsidy or net cost to the government. (See pages 18-20 and 25-29 in the CBO outlook report.)
B Davis: the discrepancy between the addition to the debt and the deficit has to do with how the cost of programs such as TARP and the Fannie/Freddie takeover are accounted for. The deficit effect is not based on the actual cash flow of Treasury debt in these cases, but based on better estimates of the implicit subsidy or net cost to the government. (See pages 18-20 and 25-29 in the CBO outlook report.)
Thanks. I had thought that TARP and the Fannie/Freddie takeover might affect the fiscal year 2009 numbers but was totally unaware of anything in fiscal year 2008. But page 18 that you referenced does state that “the Treasury’s actions aimed at stabilizing the financial markets added more than $300 billion to the Treasury’s borrowing needs in 2008 (on top of the borrowing necessary to finance the budget deficit) and will boost them by about an estimated $200 billion in 2009 (see Table 6)”. Table 6 does show the components of those numbers for 2008 and 2009. Also, it seems to show that the discrepancy in 2018 is repayment from TARP. I guess that I should read all of the report and look more closely at the tables. Anyhow, thanks for clearing that up!