Wednesday, January 27, 2010

Deficit Update

The Congressional Budget Office updated its budget outlook yesterday. They are estimating a $1.3 trillion federal budget deficit for fiscal year 2010 (9.2% of GDP), down from $1.4 trillion (9.9% of GDP) in FY 2009 (the federal "fiscal year" begins on Oct. 1 and ends on Sept. 30, so we are already about 4 months into FY 2010).

There are deficits as far as the eye can see, but they are projected to get considerably smaller over the next several years. In part, this is because the CBO is required to make projections assuming current law is followed, which means the 2001 and '03 tax cuts would expire. If they are extended, the deficit picture looks considerably worse, as can be seen in this picture I created using their nifty new website:
(The black line is the baseline forecast, the purple line adds the effect of making the Bush tax cuts permanent.)

As I suggested in the previous post, letting them expire as scheduled would probably not be a good idea given the current state of the economy, but making them permanent would make the government's long-run budget problem much worse.

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