How Large is the Real Federal Deficit?

Politicians have a habit of trying to obfuscate facts that don’t paint a positive picture.  Thus when uncomfortable discussions on the federal deficit cannot be avoided, attempts are made to conceal its true size.  For instance, the Iraq war has been funded through emergency supplemental spending, leaving it outside the official federal budget and deficit numbers, though the spending is quite real.

A simple technique can be used to reveal the true* size of the annual Federal deficit. Since all federal revenue shortfalls (deficits) are paid for through increases in the total US debt, the increase in debt each year exactly equals that year’s real federal deficit.

Here is the amount of US Federal debt outstanding from 1997-2008, for Sept. 30th of each year:

Year US Debt ($ Billions)
2008 10,024
2007 9,007
2006 8,506
2005 7,932
2004 7,379
2003 6,783
2002 6,228
2001 5,807
2000 5,674
1999 5,656
1998 5,526
1997 5,413

Using this data, we can calculate the true Federal deficit for each year, and compare it to the publicly announced deficit for that year:

Year Official US Surplus / Deficit ($Billions) Actual US Deficit
($Billions, based on actual borrowing)
% Larger than Official
2008 -410 -1017 115%
2007 -162 -501 209%
2006 -248 -574 131%
2005 -318 -553 74%
2004 -412 -596 45%
2003 -377 -555 47%
2002 -158 -421 166%
2001 128 -133 204%
2000 236 -18 108%
1999 125 -130 204%
1998 69 -113 263%

The Federal government’s need to borrow has been consistently understated in official deficits for the past decade, and has been as large as triple the official number! These numbers also show that the US government never actually ran a surplus at any time in the last decade. It appears that the first step to dealing with our government’s revenue shortfalls is to get our government to admit how large they are!

* Under US GAAP, federal deficits would be even larger, because they would take into account future Social Security and Medicare shortfalls. These programs are likely to be modified in the future, however, and so I believe that the method used above provides an accurate measure of the government’s cash deficit each year. This is a number most Americans would recognize – how much do you have to borrow to pay the bills each year?

** The argument might be made that during the “surplus” years of the late 90s, debt was increased simply to provide liquidity in treasury bond markets. This doesn’t make sense, however – if it had a cash surplus, the Treasury could easily have issued new debt while retiring old debt, leaving net debt unchanged. Economists generally take the view that government debt crowds out private sector borrowing, so why would the Treasury borrow if it didn’t need the funds?

8 thoughts on “How Large is the Real Federal Deficit?

  1. Conservative lenders were placed in competition for mortgage business against very loose lenders (Freddie, Fannie). They had to respond to the newfound competiton. Freddie and Fannie decidedly distorted the market, even though they did not underwrite most of the loans.

    Nice analysis on the true creep of the federal debt. I would like to see the government follow the accounting standards they require of everyone else, however.

    The only ultimate salvation would be if we got a handle on it right now before it gets beyond manageable. When T-bills are viewed as junk bonds.

  2. praveenghanta,
    Thank you. I will educate myself further. Many are saying that the Feds somehow pushed lenders into giving out these subprime loans to borrowers that could not afford them. Is there any support to this claim? How would the Fed force lenders to make bad loans?

  3. Dataplease – regarding my statement on mortgages, I don’t have exact percentages, but consider that jumbo loans, subprime loans, and no-doc loans are not underwritten by FNM/FRE.

    This article provides a bit more color. Basically, Fannie and Freddie only underwrote loans for less than 417k to people with “decent” credit and willing to provide full documentation for their loans.

    The McMansion buyers needing jumbos, those who bought homes using no-doc or “stated” income loans, subprime borrowers, and others who used creative financing did not get their loan through a GSE. That’s not to say that FNM/FRE did not take on excess risk – it’s just to say that the most egregious practices that talking heads now scream about were not actually part of their process.

  4. Very interesting post. Thank you for the year by year budget surplus/deficit. I think your comment that this a politics issue and not a Dems vs Repub issue is right on. Our relationship with the fed gov is a sacred trust and they have betrayed that trust in the interest of party politics and dare I say it, money. Can you provide any data to support the comment that “most of the low quality mortgages issued were actually outside of FNM/FRE guidelines”?

  5. While my analysis above only stretches back to ’98, I should perhaps extend it further. Deficits have been a part of the federal budget for a long time, but they seriously ballooned starting during the Reagan administration.

    The concept of fiscal conservatism is essentially dead in Washington. Republicans have their spending priorities (defense, tax cuts, etc), and Democrats have theirs (social programs etc). Neither party is interested in curbing spending, and I don’t honestly think it will slow down in the near future.

    Regarding your comment on the evolution of the mortgage market – most of the low quality mortgages issued were actually outside of FNM/FRE guidelines, and are more the result of excessive risk taking than anything else. Capitalism is prone to booms and busts – that’s the way it works. Government seeks to regulate it precisely because the volatility is greater than most people are prepared to accept – including many of the financiers themselves.

  6. Great!

    This should give responsible media outlets a greater opportunity to point out the history of how it is our economy got to where we are…beginning with the Community Reinvestment Act of 1977 (President Jimmy Carter); the push by the Clinton Administration to force sub-prime mortgage lenders to expand their offerings into under-qualified, high-risk groups; the money trail of industry lobbyists (esp. Freddie Mac, Fannie Mae) and their political allies (esp. Frank, Dodd, Obama, and other republicans as well); and, the efforts by the aforementioned, as well as Maxine Waters and Pelosi, to protect such industry practices via outspoken congressional opposition to reform measures.

    Abusive mindsets in government caused these problems, not capitalism, and these same folks should not be given the opportunity to wash their hands clean of history when they have meddled dangerously close to criminality.

    Pelosi never had the votes, and politics are the sole reason she brought this bill up so fast. She needs to resign!

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