'Deficit reduction'? Don't believe it.
Some commentators are touting the 'reduction' in the deficit between FY2009 and FY2010. But that's using Fed revenues to mask the truth: the budget rose $285 billion.
Stan Collender points out that the reduction in the U.S. federal deficit in fiscal year 2010 (October 2009 to September 2010) was according to preliminary estimates the biggest ever in nominal terms yet no one seems to cheer this news.Skip to next paragraph
Stefan is an economist currently working in Sweden.
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Collender explains this with people either believing for Keynesian reasons that a lower deficit is bad or that people points out that the deficit is still extremely high- the second biggest ever in nominal and real terms and the second biggest since World War II relative to GDP.
But there are other reasons not to get cheery about it, including for example that it makes little sense in this context to use nominal terms and far more importantly, that the underlying fiscal deficit in fact increased.
If you look at the preliminary report from the Congressional Budget Office, you'll see that the deficit fell by $125 billion, from $1,416 billion to $1,291 billion.
Yet the entire reduction, and more, was accounted for by the effects of financial market interventions. In fiscal year 2009, the net result of revenue from the Fed, TARP and aid to GSE (Fannie Mae and Freddie Mac) was a drag of $211 billion. By contrast, in fiscal year 2010, these items produced a net gain for the budget of $144 billion, an improvement of $355 billion.
Excluding these items, the deficit in fact rose by $230 billion, from $1,205 billion, to $1,435 billion. In addition, the cost of deposit insurance (only the change, but not the exact level is specified) fell by $55 billion, meaning that the underlying deficit rose as much as $285 billion.
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