US Federal Deficit Lower, But Tough Times Ahead For Obama

bu Mike Godfrey, Tax-News.com, Washington

20 October 2009

The US Treasury Department has released details of the fiscal year 2009 budget results, which show that the federal deficit, at a final figure of just over USD1.4 trillion, was more than USD400bn lower than expected in President Obama's 2010 budget blueprint.

The results show that the deficit has narrowed thanks to higher-than-expected tax revenues in the latter part of the fiscal year, which ended on September 30, and lower spending thanks to smaller-than-expected outlays by the government on its Troubled Assets Relief Program. Receipts for the fiscal year totaled USD2,105bn, while outlays totaled USD3,522 bn.

Individual income taxes were USD915bn, USD12bn higher than estimated in the August Mid-Session Review (MSR). Corporation income taxes were USD138bn, USD17bn higher than the MSR estimate. Inaction on the Administration's proposal to expand net operating loss carrybacks increased corporation income tax payments USD28bn relative to the MSR. This increase was partially offset by reduced corporation income tax payments and increased refunds, attributable to lower corporate profits than assumed in the MSR. Social insurance and retirement receipts were USD891bn, the same as the MSR estimate, although excise taxes and estate and gift taxes were lower than expected.

However, overall, government receipts in FY2009 were USD419bn lower than in FY2008 – a reduction of 16.6%. This was largely a result of the effects of the economic slowdown on incomes and corporate profits and the tax provisions in the Recovery Act, enacted in February 2009. On the other side of the balance sheet, outlays for FY2009 grew by USD543bn, or 18.2%, from FY2008.

According to the Treasury, the 2009 federal deficit was "largely the product of the spending and tax policies inherited from the previous administration, exacerbated by a severe recession and financial crisis that were underway as the current administration took office." But, according to the Treasury Department, the current administration also cannot escape its responsibility in adding to the sea of red ink on the government's balance sheet, and the stimulus legislation, which cost nearly USD800bn in spending and tax cuts, coupled with proposed healthcare reforms, which will cost about USD1 trillion (although its is claimed that healthcare legislation will be deficit neutral), are expected to weigh heavily on the budget in the years ahead – something which Treasury Secretary Tim Geithner has managed to concede.

"This year's deficit is lower than we had projected earlier this year, in part because we are managing to repair the financial system at a lower cost to taxpayers," Geithner commented. "But future deficits are too high, and the President is committed to working with Congress to bring them down to a sustainable level as the economy recovers."

"It was critical that we acted to bring the economy back from the brink earlier this year," said White House Office of Management and Budget Director Peter R. Orszag. "As we move from rescue to recovery, the President recognizes that we need to put the nation back on a fiscally sustainable path. As part of the FY 2011 budget policy process, we are considering proposals to put our country back on firm fiscal footing."

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