What Drove the US Budget Deficits

From Jesses' Cafe:

Downturn and Legacy of Bush Policies Drive Large Current Deficits
Economic Recovery Measures, Financial Rescues Have Only Temporary Impact
By Kathy Ruffing and James R. Horney
October 10, 2012

Some lawmakers, pundits, and others continue to say that President George W. Bush’s policies did not drive the projected federal deficits of the coming decade — that, instead, it was the policies of President Obama and Congress in 2009 and 2010.

But, the fact remains: the economic downturn, President Bush’s tax cuts and the wars in Afghanistan and Iraq explain most of the deficit over the next ten years — according to this update of our analysis, which is based on the Congressional Budget Office’s most recent ten-year budget projections (from August) and congressional action since we released the previous version of this analysis in May 2011.

The deficit for fiscal year 2009 — which began more than three months before President Obama’s inauguration — was $1.4 trillion and, at 10 percent of Gross Domestic Product (GDP), the largest deficit relative to the economy since the end of World War II. At $1.3 trillion and nearly 9 percent of GDP, the deficits in 2010 and 2011 were only slightly lower. If current policies remain in place, deficits will likely exceed $1 trillion in 2012 and 2013 before subsiding slightly, and never fall below $700 billion for the remainder of this decade.

The events and policies that pushed deficits to these high levels in the near term were, for the most part, not of President Obama’s making. If not for the Bush tax cuts, the deficit-financed wars in Iraq and Afghanistan, and the effects of the worst recession since the Great Depression (including the cost of policymakers’ actions to combat it), we would not be facing these huge deficits in the near term. By themselves, in fact, the Bush tax cuts and the wars in Iraq and Afghanistan will account for almost half of the $18 trillion in debt that, under current policies, the nation will owe by 2019.[1] The stimulus measures and financial rescues will account for less than 10 percent of the debt at that time.

President Obama, however, still has a responsibility to propose, and put the weight of his office behind, policies that will address our key long-term fiscal challenge — preventing the significant rise in debt as a percentage of GDP that will occur under current policies. Allowing the flagship Bush tax cuts — which initially were slated to end after 2010 and were extended for two years — to expire on schedule at the end of 2012 would halt the rise in the debt-to-GDP ratio. In fact, that step — or an equivalent, substitute package of deficit reductions — would reduce the debt-to-GDP ratio and stabilize it at about 70 percent in the second half of the decade. Of course, with the economy still fragile, it is prudent to continue the middle-class portion of the tax cuts for a while longer. But there is no justification for extending the entire set of expiring tax cuts indefinitely. To keep the debt stable over the longer run, when the fiscal impacts of an aging population and rising health care costs will continue to mount, policymakers will need to take large additional steps on both the expenditure and revenue sides of the budget.

Read the entire report here or download a PDF here.

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