Ballooning Treasury Deficits - It Takes both Outlays and Receipts to Tango

By: Paul Kasriel | Thu, Jan 14, 2010
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On Wednesday, the U.S. Treasury reported a record cumulative deficit over the 12 months ended December 2009 of $1.472 trillion (see Chart 1). Although the editorial board of the WSJ surely will rail against exploding federal spending, it will probably fail to mention another key driver of ballooning federal deficits - collapsing federal receipts.

Chart 1

Yes, as shown in Chart 2, the year-over-year growth in 12-month cumulative federal government outlays remains in double digits, which it entered in October 2008. But notice that the growth rate in federal outlays is slowing. It peaked at 19.2% in July 2009. As of December 2009, the year-over-year growth in 12-month cumulative federal outlays had slowed to 11.8% -- the slowest since December 2008's 12.8% growth. But look at what has been happening to the year-over-year rate of contraction in 12-month cumulative total federal receipts. In the 12 months ended December 2009 vs. the 12 months ended December 2008, total federal receipts contracted by 17.1%, a slightly slower rate of contraction than the 17.6% rate of contraction in the 12 months ended November. Of course, receipts are contracting. The U.S. economy has only recently emerged from its longest and deepest recession in the post-war era in which both corporate profits and wage/salary income collapsed (see Chart 3). Moreover, personal income taxes were cut by both the Bush (Jr.) and Obama administrations, something the editorial board of the WSJ presumably approved of.

Chart 2

Chart 3

In sum, although high growth in federal spending is contributing mightily to our record federal deficit, the rate of growth in that spending is slowing. What often is forgotten is that the rate of contraction in federal receipts has accelerated.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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