Ahem, the story from The Hill on the ever rising tide of Federal budget deficits lists financial firm bailouts first as causes of the red ink, with falling tax receipts second. And the very same bailout recipients are crowing about their profitability. Now admittedly, the biggest contributors to the July increase were Fannie and Freddie, but others have comments that the financial terms of the rescues were far too favorable to the industry. And that’s before considering that the norm in countries whose bank recapitalizations are seen as models is to get rid of existing management and the board, install replacements, give them strict targets, and then aside from checking progress against targets and being ready to intervene if results fall short, to leave the new management to sort things out. Were any real demands made of these banks? Aside from (in cases) raising more capital, the answer is pretty much “no”.
The Kenneth Rogoff and Carmen Reinhart studies of financial crises has also found the the biggest culprit in government deficits in crisis countries is not stimulus measures, but collapsing tax revenues.
From The Hill (hat tip reader Dwight):
Bailouts for financial firms and billions in tax revenue lost because of the recession drove the deficit to a record $1.3 trillion in July, according to the independent Congressional Budget Office (CBO).
Tax receipts that have fallen due to the poor economy and increased spending to save car companies, banks and mortgage firms were major contributors to the federal deficit, according to CBO, which provides official budget numbers for Congress. The federal deficit grew by another $181 billion in July.
Falling tax receipts and increased spending on bailouts for auto companies and the financial sector and for the economic stimulus package added to the deficit, according to CBO, which provides official budget numbers for Congress.
Spending through July of 2009 has increased by $530 billion, which is 21 percent over the same period in 2008. The bailout money for Freddie Mac and Fannie Mae accounted for almost half of the spending increase. Unemployment benefits have more than doubled, Medicaid spending has grown by a quarter and Medicare spending has increased by 11 percent.
Tax revenue for the first three quarters of 2009 has fallen by approximately $350 billion, or 17 percent compared to the same period last year, due mostly to the effects of the recession on payroll, income and corporate taxes. A third of the decline is due to tax breaks in the stimulus, including the middle-class tax cut that President Obama campaigned on during last year’s election.
The independent budget scorekeeper has projected the deficit to reach $1.8 trillion by the end of the fiscal year, Sept. 30. The deficit in 2008 reached $455 billion, which was a record at the time.