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Saturday, January 9, 2010

The Federal Budget: Current and Upcoming Issues

D. Andrew Austin
Analyst in Economic Policy

Mindy R. Levit
Analyst in Public Finance

The federal budget helps implement Congress's "power of the purse" by expressing Congress's spending priorities among competing aims. The Obama Administration's FY2010 budget described several important changes, including increased funding for certain domestic priorities, major programmatic reforms, and proposed spending cuts in some programs. The current economic climate continues to pose major challenges to policymakers. Federal spending tied to means-tested social programs rose due to rising unemployment, while federal revenues are projected to fall as individuals' incomes have dropped and corporate profits have sunk. Federal deficits, according to OMB and CBO projections, will likely be high relative to historic norms over the next few years, as spending rises and revenues fall relative to previously anticipated levels. FY2009 outlays rose to $3,522 billion (24.9% of GDP) and revenues fell to $2,105 billion (14.7% of GDP), yielding a total federal deficit of $1,417 billion (10.0% of GDP).

Over the past decade, federal spending has accounted for approximately a fifth of the economy (as measured by gross domestic product—GDP) and federal revenues have ranged between just under a sixth to just over a fifth of GDP. In FY2008, the U.S. government collected $2.5 trillion in revenue and spent almost $3.0 trillion. Outlays as a proportion of GDP rose from 18.4% in FY2000 to 21.0% of GDP in FY2008. Federal revenues as a proportion of GDP reached a post- WWII peak of 20.9% in FY2000 and then fell to 16.3% of GDP in FY2004 before rising slightly to 17.7% of GDP in FY2008.

The Obama Administration released the FY2010 budget outline on February 26, 2009, followed by the remaining budget documents on May 7 and 11, 2009. Major policy initiatives included new spending targeted toward health care reform, clean energy, and education. The budget resolution (S.Con.Res. 13), which followed most of the President's initiatives, was agreed to on April 29, 2009. It specified $2,322 billion in revenues and $3,555 billion in outlays, resulting in a projected FY2010 deficit of $1,233 billion. A FY2009 war funding supplemental (P.L. 111-32) was enacted in June 2009. The House passed all 12 regular FY2010 appropriations acts by the end of July 2009. The Legislative Branch appropriations bill (P.L. 111-68) enacted October 1 contained a continuing resolution to extend funding to the end of the month. On October 30, the Interior-Environment bill (P.L. 111-88), which included a second continuing resolution to extend funding until December 18, was enacted. Five remaining bills (Commerce-Justice-Science; Financial Services; Labor-HHS; Military Construction-VA; and State-Foreign Operations) were folded into the Transportation-HUD bill, creating an omnibus spending measure (H.R. 3288; P.L. 111-117) that was enacted on December 16. Finally, the defense bill (H.R. 3326; P.L. 111-118), was signed into law on December 19, finishing the regular appropriations process for FY2010.

The federal government made significant financial interventions aimed at alleviating economic recession. The final costs of federal responses to this turmoil will depend on the pace of economic recovery, how well firms with federal credit guarantees weather future financial shocks, and how much the government loses or gains on its asset purchases. Federal loans or loan guarantee programs may help provide liquidity to distressed financial markets and stimulate economic activity, but may also expose the federal government to substantial credit risks. While many economists concurred on the need for short-term fiscal stimulus despite adverse impact on the deficit, concerns remain about the federal government's long-term fiscal situation. Rising costs of federal health care programs and Baby Boomer retirements present serious challenges to fiscal stability. Operating these programs in their current form may pass on substantial economic burdens to future generations. This report will not be updated.

Date of Report: December 31, 2009
Number of Pages: 34
Order Number: R40088
Price: $29.95

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