Preliminary figures from the Congressional Budget Office (CBO) show that Washington ran a $1.291 trillion deficit in 2010, just slightly less than last year’s $1.416 trillion.
To put these figures in perspective, the annual budget deficit between 1789 and 2008 never reached $500 billion. As a percentage of the gross domestic product (GDP), the past two years’ deficits of 10.0 and 8.9 dwarf all other deficits since World War II.
Recession-damped revenues continued to contribute to the budget deficit, coming in at 14.7 percent of GDP. However, low revenues are only a temporary contributor to the budget deficit. CBO data shows that once the recession ends, revenues should converge back toward their historical average of 18 percent of the economy.
The surging spending will likely be permanent. Federal spending this past year reached 23.6 percent of the economy, which, along with last year’s 25.4 percent, are the highest spending levels in American history outside of World War II. And President Obama’s budget would permanently maintain federal spending at these high levels.
Putting these revenue and spending trends together shows that long-term deficits will be driven exclusively by above-average spending. After all, if revenues revert back to their historical average, yet spending remains 5–6 percent of GDP above its historical average, then it will not take a mathematician or economist to determine which variable is driving the deficit upwards.
Spending dipped 2 percent in 2010, from $3.520 trillion to $3.453 trillion. Unfortunately, this was not the result of actual, repeatable spending restraint. After costing $154 billion in 2009, repayments to TARP lead to a $108 billion “profit” this past year. The cost of bailing out Fannie Mae and Freddie Mac dropped from $91 billion to $40 billion. Deposit insurance costs declined $55 billion. Each of these savings represents one-time offsets from the cost of previous financial bailouts. These better-than-projected results should not, however, be confused with good policy.
The rest of the budget leaped 9 percent last year, driven by steep cost increases in Medicaid, unemployment benefits, and other “stimulus”-related costs. Over the past two years, Medicare costs have jumped 16 percent, Medicaid spending has increased 36 percent, and unemployment costs have soared 272 percent. And under President Obama’s budget, federal spending is set to continue growing, especially with the implementation of Obamacare.
Current spending trends are set to double the national debt and leave permanent trillion-dollar deficits. Responsible lawmakers who wish to avoid drowning future generations in taxes and debt should enact immediate spending cuts while also beginning fundamental Social Security and Medicare reform.