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FY 2009 Federal Budget

The Story Behind the Largest Deficit in U.S. History

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Bankers who took the bailout

TARP Recipients: (L-R) Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of New York Mellon CEO Robert Kelly, Bank of America CEO Ken Lewis and State Street CEO Ronald Logue

Chip Somodevilla/Getty Images

The FY 2009 budget was unusual because it was not signed by the President that created it. President George W. Bush submitted it to Congress in February 2008, right on schedule, but Congress stated it was dead on arrival. Why?  It was the first budget to spend more than $3 trillion, it underfunded the War on Terror, and its revenue projections ignored the warning signs of recession.

Bush's total spending was $3.5 trillion. Of this, a record $505 billion was for the military's regular operations. However, it only included $70 billion in Overseas Contingency Funds for the Wars in Iraq and Afghanistan -- just enough to fund until January 20th, when Bush left office. This was less than half of the Contingency funds budgeted for the year before, and the year after. 

Congress thought his revenue projection of $2.7 trillion was too high, given the slowing economy. (Bush proposed his budget before the March bailout of Bear Stearns, the July bailout of Fannie Mae and Freddie Mac, and before Lehman Brothers went bankrupt.)

Not to mention, it was an election year. Bush's budget cut popular programs, something that wouldn't help any Congressional member's reelection.It cut Medicare, grants to states, and kept spending for non-security departments flat. (Source: USA Today, $400 Billion Deficit to Greet Bush's Successor, February 2, 2008; American Institute of Physics, Congress and Administration Delay FY 2009 Appropriations, September 30, 2008; CBO, Monthly Budget Review FY 2009)

At the end of FY 2008 (September 30, 2008), President Bush and Congress signed a Continuing Resolution to fund the government for another six months. As a result, the newly-elected President Obama passed the FY 2009 budget, folding in $253 billion in expenses for the Economic Stimulus Act

Revenue

For Fiscal Year 2009, the Federal government received $2.1 trillion in revenue. Income taxes contributed 45%, Social Security taxes were 34%, corporate taxes were only 12%, and the remaining 9% was from excise taxes. Revenue was drastically reduced by the financial crisis, which lowered incomes for both families and businesses.

Spending

Total spending was $3.518 trillion. More than half was Mandatory spending. These are programs that have been established by an Act of Congress, and must be funded to meet their program goals. Congress cannot cut spending in these programs without another Act. The budget for these programs are estimates of what it will cost to fund them.

The interest on the Federal debt was $187 billion, or 5% of total spending.. This, too, is an estimate of what must be paid to owners of U.S. debt. 

The rest is Discretionary spending. These are programs that Congress must authorize funding for each year. The largest category is Military spending. For more on how this works, see Budget Process.

Mandatory - Mandatory Spending was $2.1 trillion, or 56% of the U.S. Federal Budget. It included Social Security ($678 billion), Medicare ($425 billion) and Medicaid ($251 billion combined). It also included $151 billion for TARP which was moved to Mandatory Spending after it was approved by Congress in 2008.

Discretionary - Discretionary spending was $1.2 trillion, or 35% of total spending. More than half ($782 billion) was what the OMB called Security spending: Department of Defense and Homeland Security.

Only $437 billion was spent on non-security programs. The largest departments were: Health and Human Services ($77 billion), Transportation ($70.5 billion), Education ($41.4 billion), Housing and Urban Development ($40 billion), and Agriculture ($22.6 billion). It included $253 billion from the Economic Stimulus Package. (Source: OMB FY 2011 which shows actual spending for FY 2009,Table S-11)

Military Spending Increased - Total security spending for FY 2009 was $782 billion, more than the $747 billion in the FY 2008 budget and way more than the $686 billion actually spent. Security spending started with the Department of Defense Base Budget, which was $513 billion, and Supplemental Funding for the War on Terror. Add to that Veterans benefits of $47.6 billion, which was expanded to care for the increased number of wounded service members, especially those needing mental health treatment from traumatic battle experiences and head wounds. Security spending also included $9 billion for Nuclear Security, and $42 billion for Homeland Security. The FY 2009 Budget included $38 billion for the State Department and other international programs.

Largest Budget Deficit in U.S. History:

The FY 2009 budget deficit was $1.413 trillion, the largest in history.  It's $1.016 greater than Bush's proposed budget deficit of $407 billion. As you can guess, Republicans blame Obama, while Democrats blame Bush. However, the chart below shows where the real blame lies -- the greatest recession since the Great Depression

Difference Between Proposed and Final FY 2009 Budget
Category Proposed Budget Final Budget Unbudgeted Contribution to Deficit
Revenue $2.700 $2.105 trillion     $595 billion
TARP 0    $151 billion     $151 billion
ARRA 0    $253 billion     $253 billion
Other 0      $17 billion        $17 billion
Total --- ---  $1.016 trillion

 

Deficit spending during a recession is appropriate. However, it's become an issue because large budget deficits have been a part of the federal budget since President Nixon. Before that, deficits were only run up to finance wars. By the end of FY 2008, the debt had grown to $10 trillion.

In the long-term, this escalating debt weakens the dollar. That's because the Treasury Department must issue new Treasury notes to pay for the debt. This has the same effect as printing dollar bills. As the dollar floods the market, supply outstrips demand. The value of the dollar will slowly drop.

As the dollar's value decreases, it makes the price of imports rise. A huge debt burden eventually creates the fear that it might not be repaid. Or, that the government will have to raise taxes to pay for it. This acts as a further drag on economic growth. For more, see How the National Budget Deficit Affects the Economy Article updated October 25, 2013

Compare to Other U.S. Federal Budgets

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