The Impact of Major Legislation on Budget Deficits: 2001 to 2009

Marc Labonte
Specialist in Macroeconomic Policy

Andrew Hanna
Presidential Management Fellow

After recording a fiscal year (FY) 2000 federal budget surplus of $236.2 billion, the Congressional Budget Office (CBO) in January 2001 projected continued surpluses throughout the decade. However, enactment of major legislation during the 107th to 111th Congresses, in combination with changing economic conditions, altered the federal budget outlook for the decade dramatically. In FY2002, the budget recorded a deficit for the first time since 1997, and the federal government has run a deficit in each subsequent year. 

This report examines to what extent major legislative changes from 2001 to 2009 caused the budget to move from surplus to deficit. Legislative actions taken in 2009 increased the FY2009 deficit by $509 billion, whereas legislative actions taken between 2001 and 2008 increased the FY2009 deficit by $903 billion. Furthermore, legislative changes have cumulatively increased federal budget deficits over FY2001 to FY2009 by $5.4 trillion. 

Several major tax laws passed by Congress reduced federal government revenues, including the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27), and the Working Families Tax Relief Act of 2004 (P.L. 108-311). On an aggregated basis, estimates by CBO and the Joint Committee on Taxation (JCT) at the time of legislative enactment placed the total anticipated cost for these three laws at $1.76 trillion for FY2001 to FY2011. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173) established a new Medicare Part D prescription drug benefit, which CBO originally projected would cost $552.2 billion over 10 years. However, the Boards of Trustees for Medicare estimated in May 2009 that Part D expenditures would total $381.3 billion for this same period. 

Funding for "Global War on Terror" operations has been provided primarily through emergency supplemental appropriations law. For FY2001 to FY2009, Congress approved legislation appropriating about $943.8 billion for military operations in Iraq and Afghanistan, with $887.8 billion of this amount allocated to the Department of Defense. 

On September 6, 2008, the Federal Housing Finance Agency exercised authority provided under the Housing and Economic Recovery Act of 2008 (P.L. 110-289) to place Fannie Mae and Freddie Mac into conservatorship. In August 2009, CBO estimated net subsidy costs related to Fannie Mae and Freddie Mac at $291 billion for FY2009. The Emergency Economic Stabilization Act of 2008 (Division A of P.L. 110-343) established the Troubled Asset Relief Program (TARP). In January 2010, CBO projected TARP would increase budget deficits by $99 billion over the complete duration of the program. 

In response to significant weakness in the U.S. economy, the Economic Stimulus Act of 2008 (P.L. 110-185) provided a refundable individual income tax rebate. JCT estimated in February 2008 that P.L. 110-185 would increase federal budget deficits by approximately $124.5 billion for FY2008 to FY2018. To provide additional economic stimulus, Congress enacted the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) on February 17, 2009. In January 2010 CBO estimated that P.L. 111-5 will increase federal budget deficits by $862 billion over 10 years.


Date of Report: March 23, 2010
Number of Pages: 36
Order Number: R41134
Price: $29.95

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