A Taste of Deficits to Come?

If there was any doubt that the economic crisis had serious implications for the federal deficit — and therefore for President-Elect Barack Obama’s nascent administration — doubt no more: The Congressional Budget Office on Friday issued its monthly budget review.

The bottom line: The deficit jumped to $455 billion in fiscal 2008, ended Sept. 30, from $162 billion in 2007. Put another way, it more than doubled to 3.2% of Gross Domestic Product from 1.2%.

And just in the month of October, the new fiscal year’s preliminary deficit reached $232 billion. Depending how you count it, the Oct. 3 financial-rescue bill either contributed $17 billion — or $115 billion.

Here's how that works: Treasury disbursed $115 billion to banks during the month under the bailout bill, so the cash cost is $115 billion. Simple.

But in return, Treasury got preferred stock and warrants. CBO says that means it's an investment, and should be recorded at net present value "accounting for market risk"; it helps that the bailout bill itself specified that this is how the transactions should be recorded.

Voila, $115 billion cash outlay becomes $17 billion cost on a net present value basis. (Just to refresh your memory: Net present value means looking at the current cash outlay, offset by what the government can expect to receive from dividends and repurchases in the future, and taking into account the time value of money; all of which involves making a variety of assumptions, of course.)

Using the cash cost, the total deficit for October amounts to $232 billion; otherwise, it's just $134 billion. Meantime, October receipts declined $13 billion year-over-year -- $5 billion in corporate taxes, $7 billion from individual and payroll taxes. Non-bailout spending rose $46 billion, about half of it stemming from calendar flukes and the timing of various payments, the rest from higher defense and entitlement costs.

Here are some other details that caught our attention:

  • More of the fiscal 2008 increase in the deficit is from a decline in revenue (1.1% of GDP), rather than increased spending (0.9%).
  • The biggest contributor to the fiscal 2008 revenue drop: corporate income-tax receipts, which fell nearly 18% ($66 billion) year-over-year, and from 2.7% of GDP to 2.1%.
  • By contrast, individual income-tax receipts fell by 1.5% ($18 billion) in fiscal 2008 -- and that includes $66 billion in stimulus rebates issued starting last spring.

All in all, not an welcoming start to the fiscal year that the new administration and Congress will inherit in about 2-1/2 months.

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