The nation's budget situation is challenging. In fiscal year (FY) 2008, the budget deficit reached $455 billion or 3.2% of gross domestic product (GDP), up from $161 billion or 1.2% of GDP in FY2007. New deficit projections provide a picture of what the United States faces over the next decade. In February 2009, the Congressional Budget Office (CBO) projected that the deficit in FY2009 will reach more than $1.4 trillion, which includes the deficit impact of the American Recovery and Reinvestment Act (ARRA; H.R. Between FY2010 and FY2019, cumulative deficits could reach as high as $10 trillion. CBO projects deficits in each fiscal year of this period. These deficits are largely a result of federal financial intervention and fiscal stimulus legislation designed to alleviate the credit crunch and to bolster the economy. Current economic conditions have also led to increases in outlays for certain government social programs and declines in revenue collections, leading to further deterioration in the budget balance. Deficits can serve as a powerful instrument of fiscal policy. Occasional deficits, in and of themselves, are not necessarily problematic. Deficit spending allows governments to smooth outlays and taxes to shield taxpayers and program beneficiaries from abrupt economic shocks. Persistent deficits, on the other hand, lead to growing accumulations of federal debt that may lead to higher interest payments, tax increases, or spending cuts. Recent Policies and Their Effects on the Deficit

Several significant federal financial interventions were enacted in 2008 and early 2009 in an effort to relieve the credit crisis and mitigate the economic affects of the recession on Americans. These include the enactment of economic stimulus in early 2008, the Housing and Economic Recovery Act (HERA) in July 2008, the Troubled Assets Relief Program (TARP) and its components in October 2008, the extension of unemployment benefits in November 2008, and the American Recovery and Reinvestment Act (ARRA) in February 2009. Technical changes in FY2009 largely stem from the decision to include the net present value of Fannie Mae and Freddie Mac's existing assets and liabilities, as discussed earlier. In his budget proposal, President Obama also outlined specific policies he hopes to implement, which include significant new agendas with regard to energy, health care, and education. If all of these provisions are enacted, the President's budget proposal would result in an FY2009 deficit of $1.8 trillion or 12.3% of GDP. To eventually reduce the deficit would require less spending, increased taxes, faster than average economic growth, or a combination of these things. Over the long-term, entitlement spending, especially as it relates to rising health care costs, is projected to increase rapidly. CBO has concluded that "under any plausible scenario, the federal budget is on an unsustainable path," over the long run. Large economic and technical changes point to the significant uncertainty behind budget projections, even over short periods of time.
In fiscal year (FY) 2008, the nation's budget deficit reached $455 billion or 3.2% of gross domestic product (GDP), up from $161 billion or 1.2% of GDP in FY2007. New deficit projections provide a picture of what the United States faces over the next decade. In February 2009, the Congressional Budget Office (CBO) projected that the deficit in FY2009 will reach more than $1.4 trillion. Between FY2010 and FY2019, cumulative deficits could reach as high as $10 trillion. CBO projects deficits in each fiscal year of this period. These deficits are largely a result of enacted federal financial intervention and fiscal stimulus legislation designed to alleviate the credit crunch and to bolster the economy. Current economic conditions have also led to increases in outlays for certain government social programs and declines in revenue collection, leading to further deterioration in the budget balance.
Several significant federal financial interventions were enacted in 2008 in an effort to relieve the credit crisis and mitigate the economic effects of the recession on Americans. These include the enactment of economic stimulus in early 2008, the Housing and Economic Recovery Act in July 2008, the Troubled Assets Relief Program (TARP) and its components in October 2008, the extension of unemployment benefits in November 2008, and the American Recovery and Reinvestment Act (ARRA) in February 2009. Other actions have involved the purchase of assets largely utilizing existing or expanded authority.
Deficits can serve as a powerful instrument of fiscal policy and are not necessarily problematic. Governments use deficit spending to smooth outlays and taxes so that taxpayers and program beneficiaries are shielded from abrupt economic shocks and to mitigate the size of those shocks. However, persistent deficits lead to growing accumulations of federal debt that may lead to higher interest payments, tax increases, or spending cuts.
Over time, deviations from baseline deficit projections can be attributed to three broad causes: legislative, economic, and technical changes. Projected fiscal balances can differ significantly from actual outcomes. Changes in legislative policy between January 2008 and January 2009 are likely to more than double the FY2009 deficit according to revisions to the CBO baseline over that period. Further, technical changes, largely attributed to the government placing Fannie Mae and Freddie Mac into conservatorship, will add hundreds of billions of dollars to the FY2009 deficit. Other factors will also contribute to a larger deficit in FY2009.
In his budget proposal, President Obama also outlined specific policies he hopes to implement, which include significant new agendas with regard to energy, health care, and education. If all of these provisions are enacted, the President's budget proposal would result in a FY2009 deficit of $1.752 trillion or 12.3% of GDP.
When the economy recovers from the current downturn, Congress may choose to focus more effort on balancing the budget and reining in debt by spending less, increasing taxes, or a combination of these things. Over the long-term, balancing the budget is further complicated by significant issues regarding entitlement spending, especially as it relates to rising health care costs. CBO has concluded that "under any plausible scenario, the federal budget is on an unsustainable path."