'09 budget deficit tripled to $1.4 trillion

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By David M. Dickson

The federal budget deficit more than tripled to $1.4 trillion in the fiscal year that ended last month, the Treasury Department confirmed Friday.

Relative to the size of the economy, the fiscal 2009 deficit was 9.9 percent of gross domestic product, the biggest shortfall since 1945. For each dollar of revenue, the federal government spent $1.67.

"The good news is there is nothing here indicating something much worse than we expected in January," said James R. Horney, a budget expert at the liberal Center on Budget and Policy Priorities. "The bad news is that the nation experienced the worst downturn since the Great Depression, and it will be a tough slog to get out of it."

In January, before Barack Obama became president, the nonpartisan Congressional Budget Office estimated the 2009 deficit would total nearly $1.2 trillion.

In its midsession budget review released in late August, the Obama administration projected budget deficits of $1.5 trillion for fiscal 2010 and $1.1 trillion for fiscal 2011. For the 2010-2019 period, the White House expects cumulative deficits to exceed $9 trillion.

"The size of the federal government increased 18 percent in 2009, an historic and completely unsustainable spending rise," said Brian Riedl, a budget analyst at the conservative Heritage Foundation. "A $1.4 trillion budget deficit was unimaginable before this year," Mr. Riedl said. Now, he worries, it could be the standard for years to come.

The longest, deepest recession in seven decades ravaged revenues in fiscal 2009, which ended Sept. 30. Total revenues plunged by $419 billion, or 17 percent, to $2.1 trillion in 2009. Revenues as a share of GDP totaled about 15 percent, the lowest level in more than 50 years.

As unemployment soared throughout the year, rising from 6.2 percent in September 2008 to 9.8 percent last month, individual income tax revenues plummeted 20 percent. Revenue from corporate income taxes plunged more steeply, dropping 55 percent.

Meanwhile, recession-related spending soared, including the bailout of the financial system and surging payments for unemployment benefits, food stamps and health care for the poor.

Budget outlays jumped by $543 billion in fiscal 2009, surpassing $3.5 trillion. That was nearly 25 percent of GDP, the highest level in more than 50 years.

Nearly half of the increase in spending resulted from the $154 billion in costs incurred by the Troubled Asset Relief Program, which bailed out the banks and General Motors and Chrysler, and the $96 billion injected into Fannie Mae and Freddie Mac, the insolvent mortgage-financing giants now owned by the federal government.

Unemployment benefits increased from $47 billion in 2008 to $117 billion last year. Spending on food stamps jumped more than 40 percent to $55.6 billion. Federal outlays for Medicaid, the health care program for the poor, climbed 25 percent to $251 billion.

Defense spending rose 7 percent to $637 billion.

In a separate report, the Treasury Department announced that, in August, foreigners purchased $28.6 billion more in U.S. long-term assets, such as Treasury securities and corporate stocks and bonds, than they sold.

Foreign holdings of Treasury bonds and notes increased by $23.9 billion in August after rising by $31.1 billion in July and $100.5 billion in June. Foreign holdings of short-term Treasury bills fell $2.5 billion in August after rising an average of nearly $20 billion during the previous three months.

Economists worry that a declining demand for U.S. Treasury debt could force U.S. interest rates to rise and make it considerably more expensive to finance America's bulging budget deficit.

At the end of fiscal 2008, foreigners owned nearly 50 percent of the $5.8 trillion in federal debt held by the public. In fiscal 2009 alone, U.S. publicly held debt soared by more than $1.7 trillion, according to Treasury Department data.

China, which has joined Russia in demanding an alternative to the U.S. dollar as a reserve currency, reduced its holdings of Treasury securities in August by $3.4 billion to $797.1 billion. China, however, remains the largest foreign holder of Treasury debt.

China's dollar holdings are derived from the massive trade surpluses it runs each year with the United States. In 2009, China is on track to achieve its fifth consecutive trade surplus exceeding $200 billion.

Low interest rates throughout fiscal 2009 resulted in one bright spot for the budget. Net interest costs plunged from $260 billion in fiscal 2008 to $202 billion in 2009. However, with budget deficits projected to average nearly $1 trillion per year over the next decade, sending America's debt levels soaring, rising interest rates could make a very difficult fiscal situation much worse, economists warn.