Nearly Half a Trillion in the Red in Just Three Months

Blog Post
Tuesday, January 13, 2009

There’s news from the Treasury Department today (monthly Treasury statement) on the federal budget deficit for the first quarter of fiscal year 2009 (i.e., 4th quarter of calendar year 2008). I guess this is what a year headed for a (way?-)more-than-a-trillion-dollars deficit looks like; AP reports:

The federal government already has run up a record deficit of $485.2 billion in just the first three months of the current budget year, the Treasury Department said Tuesday.

The deficit is on track to surpass $1 trillion for all of fiscal 2009 and some economists believe it could go much higher.

The deficit for December totaled $83.6 billion, a sharp deterioration from a year ago when the government managed a surplus of $48.3 billion…

All the red ink is occurring because of the massive spending on the $700 billion financial rescue program and a prolonged recession which has depressed tax revenues.

The imbalance from October through December is the highest on record for a first quarter and surpasses the mark for a full budget year of $454.8 billion set last year.

The Congressional Budget Office last week projected that the deficit for this fiscal year will hit $1.2 trillion…not includ[ing] any of the costs from the economic stimulus program that President-elect Barack Obama is hoping Congress will pass in the next few weeks…

The red ink through December includes $247 billion that has been spent on the $700 billion financial rescue program [TARP]…

Yet, as this CNN-Money story points out, despite the ballooning federal debt, interest payments are actually down from a year ago because interest rates are now so low:

According to the report, Treasury also paid nearly $43.5 billion in interest on its outstanding debt in the first quarter of the fiscal year, down from nearly $58 billion paid during the same period a year ago, reflecting the dramatic drop in interest rates on Treasury bonds.

Treasury has been issuing bonds at a record pace in the past few months to pay for its massive bailout programs. Although the Treasury adds to the deficit whenever it issues bonds, that issuance has come cheap recently as interest rates have plummeted to record lows.

Can/will those interest rates stay low as the debt continues to rise at a pace just around $1 trillion per year?  No. Just look at the CBO report, which shows (Table 2, pg. 12) that although short-term interest rates are forecast to remain in the zero-to-one percent range for 2009 and 2010, they are expected to rise to the 4-to-5 percent range by the latter half of the ten-year budget window. Even under the current-law baseline with no extension of any of the tax cuts, annual net interest payments double in just five years–from $195 billion (1.4 percent of GDP) in fiscal year 2009, to $392 billion (2.2 percent of GDP) in fiscal year 2014. (And under Concord’s more realistic, plausible baseline, net interest in fiscal year 2014 reaches $479 billion–i.e., in nominal dollar terms, coincidentally exceeding the magnitude of last fiscal year’s (”previous record”) deficit.)

--Diane Lim Rogers (cross-posted at