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Sick of the Budget Deficit? Read This

http://www.fool.com/investing/general/2010/02/09/sick-of-the-budget-deficit-read-this.aspx

Morgan Housel
February 9, 2010

If you'd like to enjoy the rest of your day, keep your distance from the Congressional Budget Office's (CBO) website. There, you'll find a small mountain of nonpartisan information on our nation's finances, including 2010's now-infamous $1.3 trillion budget deficit. (If you listen to the Office of Management and Budget, it's an even higher $1.6 trillion.)

Depending on your sense of humor, these deficits are either hilarious or tear-jerking.

If you can grasp the absurdity of the numbers (tens of trillions in red ink over decades), it's hard to not laugh. At the same time, it's horrifying: We know what happened to Citigroup (NYSE: C  ) and AIG (NYSE: AIG  ) when their liabilities got out of control. More comparatively, no one takes Dubai or Greece seriously anymore, after their recent sovereign debt woes. This is scary stuff. How will we ever pull ourselves out? That's a question economists, politicians, and average Joes desperately want to know.

But here's a more important question: How did we get here? What exactly happened that pushed us from record surpluses in 2000, to moderately scary deficits in the mid-2000s, to horrific, mind-blowing deficits today?

To answer that, I pulled up three long-term CBO budget forecasts: one from 2000, one from 2006, and the most recent for 2010. By comparing the same-year differences of each report, we can see exactly where and why the budget fell off track.

This first table compares 2005 budget estimates made in the year 2000 with what actually happened:

Segment

2005: Actual vs. 2000 Estimate

Revenue

($142 billion)

Discretionary Spending

$266 billion

Mandatory Spending

($9 billion)

Source: Congressional Budget Office, author's calculations.

In English: The government collected $142 billion less revenue in 2005 than was projected in 2000. It also spent about $250 billion more than planned.

What happened? For one, there was a good round of tax cuts enacted under President Bush. And two wars. You know the story. Moreover, the economy didn't grow as fast as expected. Remember, 2000 was the peak of the dot-com boom. Companies like Microsoft (Nasdaq: MSFT  ) , Cisco (NYSE: CSCO  ) , and a then-infant Google (Nasdaq: GOOG  ) were fueling growth that made forecasters college-freshmen-drunk with optimism. Once the bubble burst and the post-9/11 recession hit, growth waned.

This second table is even more important. It shows the difference between the 2006 and 2010 CBO budget forecasts for the 2010-2013 period. These are the changes that pushed the current budget deficit off a cliff:  

Changes between 2006 and 2010 forecast (in billions)

Segment

2010

2011

2012

2013

Revenue

($708)

($468)

($414)

($328)

Social Security

$27

$17

$7

($2)

Medicare

($15)

($13)

($35)

($39)

Medicaid

$23

($10)

($31)

($42)

Other Mandatory*

$155

$191

$113

$82

Defense

$159

$153

$144

$135

Nondefense Discretionary

$153

$131

$99

$79

Total Deficit (includes changes in interest paid)

($1,127)

($866)

($687)

($578)