The fiscal deficit of the federal government is expanding rapidly. The impact of the economic downturn is evident in both receipts and outlays. The deficit will likely reach $1.9 trillion in the fiscal year ending September 30, 2009, setting a new record by a wide margin. A fiscal stimulus package, the ARRA, was enacted on February 17, 2009. That, along with recent Congressional responses to the President’s budget requests, virtually guarantees high levels of spending through fiscal 2010, while revenues will remain weak. This expansionary fiscal policy, if maintained beyond the recovery phase of the economy, could create financing difficulties. In the near term, however, there will be little or no adverse effects on the financial markets, and it should prove adequate growth.

During the first half of the current fiscal year, total federal government receipts were down 13.6% compared to the same period one year ago, while total outlays were up 33.2%. Individual income tax collections were off 15.3%, and corporate income tax receipts were down 56.6%. Spending on social insurance programs was up dramatically. Medicaid expenditures were up 17.0%, and unemployment benefits payments more than doubled. In addition, fiscal-year-to-date outlays for the purpose of stabilizing the credit markets and the banking system, along with support to automakers, totaled $350 billion.

The Congressional Budget Office estimates that spending associated with the ARRA will total a net $788 billion through fiscal 2019. The adjacent table shows the estimated composition of the stimulus package in calendar years 2009 and 2010. As we previously anticipated, the package is heavy on subsidies and transfer payments, short on infrastructure construction, and devoid of cuts in marginal tax rates.

Nevertheless, the ARRA will be moderately effective in filling the hole in aggregate demand that has developed in the private sector. We estimate that the package will have a multiplier effect of a little less than one. This implies that, on average, every dollar from the package will produce somewhat less than a dollar of additional economic output over the next few quarters. Still, the package should be adequate to pull the economy out of recession around year end 2009. We calculate that fourth quarter 2009 real GDP will be about 0.8% higher than it would have been without the package and that fourth quarter 2010 real GDP will be about 2.4% higher.

In addition to the ARRA, other legislation will increase the deficit both this year and next. When Congress completed the budget process for fiscal 2009, it boosted expenditures by about $40 billion more than anticipated. The Obama Administration submitted its proposed budget for fiscal year 2010, and it currently appears that Congress will pass something close to what the Administration has asked for-if not in exact detail, at least in total spending. Spending will rise significantly in both fiscal 2009 and 2010 while revenues remain suppressed by a weak economy, sending the deficit to a record in 2009 with only small improvement in 2010.

Total federal debt held by the public will increase to about two-thirds the level of the GDP, exceeding the peak of the 1990s but still well below that of the late 1940s and early 1950s. Although increased debt levels will create future difficulties, the size of the debt in the near term will not push the private sector needs out of the credit markets because private demand for credit is shrinking due to the recession while the demand for Treasury debt has grown due to its safe-haven status.