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:


2005: Actual vs. 2000 Estimate


($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)











Social Security















Other Mandatory*










Nondefense Discretionary





Total Deficit (includes changes in interest paid)





Source: Congressional Budget Office, author's calculations.
*Change in "other mandatory" largely from increased unemployment benefits.

This table is admittedly hard to interpret, but here are the major points:

  • Compared with 2006 projections, today's deficits overwhelmingly came from drops in revenue, not increases in discretionary spending. Of the $1.1 trillion increase in 2010's deficit over 2006's projections, $708 billion (63%) came from lost tax revenue.
  • Revenue fell because of unemployment, decreased corporate profitability, and tax cuts enabled by the $787 billion stimulus package.
  • Increases in nondefense discretionary spending (fodder for most shouting on cable news networks) is small potatoes compared with the plunge in revenue. 

Keep these facts in mind, because they're important when digesting today's acidic rhetoric. Current deficit explosions aren't due to earmarks, death panels, or bailouts. Overwhelmingly, they're due to cliff-diving drops in tax receipts, which came from a combination of tax cuts and (more importantly) income stolen by the Great Recession.

But that's just short-term. As I showed in a previous article, the long-term battle almost entirely surrounds entitlements -- Social Security, Medicaid, and Medicare. Medicare is the real biggie (a $37 trillion shortfall over 75 years). And since health-care reform now looks like it'll be symbolic at best, this problem isn't going away -- great news for UnitedHealth (NYSE:UNH) and WellPoint (NYSE:WLP), but potential suicide for long-term budget deficits. As economist James Kwak from Baseline Scenario put it, "If politicians were actually serious about deficits, they would vote for health care reform 100-0 in the Senate." That's far more factual than it is opinionated.

So if you're sincerely sick of budget deficits, you should have just two concerns: How to get government revenue back up, and how to keep entitlement spending down. Those two factors alone overwhelmingly explain why we're in a budgetary cesspool compared with 10 years ago. Before they're tackled, everything else is just noise.