The FY 2010 Deficit

Treasury and OMB released the final deficit number for FY 2010 on Friday: $1.294 trillion. While $120 billion lower than last year's deficit, it still represents the second biggest deficit in the country's history in nominal terms. It also represents 8.9 percent of GDP, a percentage point lower than last year's deficit.

The final number is just about the same as the one that CBO produced in its final Monthly Review for FY 2010. However, the deficit is a few hundred billion dollars lower than the Administration projected either in the President's Budget or in the Mid-Session Review. All of that difference is accounted for with lower outlays. In fact, instead of increasing by a couple hundred billion dollars--as both projections expected--outlays actually declined from 2009 to 2010. Also, the deficit is $50 billion lower than CBO projected in August. Regardless of these differences, the deficit number is unusually high.

Much of the decrease in the 2010 deficit compared to 2009 is due to lower spending on emergency programs, mainly TARP, Fannie Mae and Freddie Mac, and deposit insurance. In fact, excluding these three programs, outlays actually increased by slightly less than $200 billion. The net effect was a $65 billion decline in outlays, which, coupled with economic growth over the past year, decreased outlays as a percentage of GDP by 1.2 percentage points between 2009 and 2010. The rest of the deficit decrease is accounted for by increased revenue as a result of moderate economic improvement since 2009.

The decline in the deficit, though, does not mean we'll be out of the woods in a few years. Even when our deficit declines as the economy (presumably) recovers, it never reaches a sustainable point. It will only decline to about 4 percent of GDP (in the President's Budget) before rising again by the end of the decade; this means that the national debt will continue to grow as a share of the economy throughout the decade.

The $1.3 trillion deficit this year may be tolerated as a necessary move to get the economy going, but it serves as a reminder that we have some serious fiscal problems to deal with very soon.