Recession Is Top Factor in Swelling Budget Deficits


As costly as President Barack Obama's proposals to revive the economy are, they pale in comparison to the impact the recession has had on the federal budget and its astonishingly huge deficits.

Obama's new spending blueprint, released Monday, says his proposals to temporarily juice the economy would cost $282 billion over the next three years—nothing to be sneezed at. Yet the lost federal revenues and higher benefit payments the recession has forced have been far higher.

Total government receipts have plummeted, including a knee-shaking drop in the money collected from corporate income taxes of nearly two-thirds.

Payment for unemployment compensation nearly tripled, while spending for Medicaid, food aid and other income assistance programs has also grown.

The reason: The revenue code and the nearly two-thirds of the $3.8 trillion budget that pays benefits like Social Security and Medicare are on cruise control, automatically levying taxes and issuing payments from one year to the next.

As the economy weakens—as it has since the worst recession in decades began in December 2007—the government collects less revenue from people and companies that are earning less, and pays benefits to more Americans as the number of poor and unemployed swells.

"This recession has been unusually deep and had an unusually large impact on budget deficits," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates fiscal constraint. "It far outweighs any policy choices the president and Congress make. It's devastating."

According to White House budget director Peter Orszag, the recession has added a cumulative $2.5 trillion to projected deficits over the next decade. (Watch video for Peter Orszag's interview with CNBC Monday on Obama's budget)

OMB Director on Budget

With voters focused on jobs and midterm elections for control of Congress just 10 months away, Obama's economic proposals and lawmakers' reaction to them will draw most of the public's attention. But sprinkled through the budget's obscure historical tables are nuggets that spotlight the toll the country's economic tailspin has taken:

—The government collected more than $2.5 trillion in revenue in 2008. That figure tumbled to $2.1 trillion last year and is not projected to recover to 2008 levels until 2011.

—Corporate revenue collections went into freefall, plunging from $304 billion in 2008 to $138 billion last year. Over that same period, individual income tax collections fell by about one-fifth. Neither is expected to return to 2008 levels until 2012.

—Payments to unemployed people surged from $46 billion in 2008 to $128 billion last year, and the administration projects the figure will hit $194 billion this year. While that's partly because Obama and Congress have made benefits more generous, the biggest factor is that there are 7 million fewer jobs than there were when the recession began.

—Food stamps and other nutrition programs, $61 billion in 2008, hit $84 billion last year and are on track to grow again this year.

—Medicaid, which provides health care to low-income people, spent just over $200 billion in 2008 but is growing and projected to reach nearly $300 billion by 2011.

—Total benefits paid to people who qualify because their incomes are low were $389 billion in 2008. That mushroomed to $449 billion last year and is expected to surge again to $527 billion this year.

Amid those gloomy figures was one recession dynamic that actually helped the government enormously. The Fed has driven down interest rates to nearly zero, a huge crutch to the government when it comes to financing its $12.3 trillion debt.

As a result, the money the government must pay in interest dropped from $253 billion in 2008 to $187 billion last year and will stay about the same this year. Even $187 billion is a significant sum, though, equaling about what the government will spend this year on all its education, job training, science, environment and agriculture programs.

But alas, the administration expects interest rates to rise anew along with the economic recovery. And that means its annual interest payments will balloon again, with Obama projecting that they grow steadily to $571 billion by 2015 -- more than one of every $10 the government would spend that year.