FY 2009 U.S. Federal Budget and Spending

The Story Behind the Largest Deficit in U.S. History

FY 2009 budget
President Bush (L) and President Obama (R) walk together after Obama's Inauguration. Did they know they shared the largest budget deficit in U.S. history?. Photo by J. Scott Applewhite-Pool/Getty Images

The fiscal year 2009 budget describes Federal government revenue and spending for October 1, 2008, through September 30, 2009. The Bush Administration submitted it to Congress in February 2008, right on schedule, but Congress stated it was dead on arrival. Why?  It was the first budget to propose spending more than $3 trillion, it underfunded the War on Terror, and its revenue projections ignored the warning signs of recession.

As a result, it wasn't signed until President Obama took office in 2009. At the end of FY 2008 (September 30, 2008), President Bush and Congress signed a Continuing Resolution to fund the government for another six months. As a result, the newly-elected President Obama passed the FY 2009 budget, folding in $253 billion in expenses for the Economic Stimulus Act. For more on how this works, see Budget Process.

Revenue

For FY 2009, the Federal government received $2.105 trillion in revenue. Income taxes contributed $915 billion, Social Security taxes added $654 billion, and Medicare taxes were $191 billion. Corporate taxes were fourth, at $138 billion, while the rest was made up of Excise taxes ($62 billion), Unemployment insurance taxes ($38 billion) and interest on Federal Reserve deposits ($34 billion). Revenue was drastically reduced by the financial crisis, which lowered incomes for both families and businesses.

 (Source: OMB FY 2011 budget, which shows actual spending for FY 2009, Table S-11)

Congress thought the original FY 2009 revenue projection of $2.7 trillion was too high, given the slowing economy. As it turned out, Congress was right. Bush proposed his budget before the March bailout of Bear Stearns, the July bailout of Fannie Mae and Freddie Mac, and before Lehman Brothers went bankrupt.

(Source: "FY 2009 Budget, Summary Tables," OMB.)

Spending

FY 2009 actual spending was $3.518 trillion. More than half was Mandatory spending. These are programs that have been established by an Act of Congress, and must be funded to meet their program goals. Congress cannot cut spending in these programs without another Act. The budget for these programs are estimates of what it will cost to fund them.

The interest on the federal debt was $187 billion, or 5 percent of total spending. This, too, was an estimate of what must be paid each year to owners of U.S. debt. 

The rest was discretionary spending. These are programs that Congress must authorize funding for each year. The largest category is military spending. 

Mandatory:

Mandatory spending was $2.112 trillion, or 60 percent of the U.S. Federal Budget. It included Social Security ($678 billion), Medicare ($425 billion) and Medicaid ($251 billion). It also included $151 billion for TARP which was moved to the mandatory budget in subsequent budgets, since it was approved by an Act of Congress.

Discretionary:

Discretionary spending was $1.219 trillion, or 35% of total spending. Only $396.5 billion was spent on non-military programs. The largest of these were: Health and Human Services ($77 billion), Transportation ($70.5 billion), Education ($41.4 billion), Housing and Urban Development ($40 billion), and Agriculture ($22.6 billion).

These departmental budgets included a boost from the Economic Stimulus Act

Military spending for FY 2009 was $822.5 billion. This includes:

  • The Department of Defense  base budget - $513.6 billion, a new record.
  • Supplemental Funding for the War on Terror - $153.1 billion. This originally only included $70 billion for the Wars in Iraq and Afghanistan -- just enough to fund until January 20th, when Bush left office. That's less than half of the prior year's level. 
  • Departments that support the military - $149.4 billion. This includes the Department of Veterans Affairs ($49 billion), which was expanded around $10 billion to care for the increased number of wounded service members, especially those needing mental health treatment from traumatic battle experiences and head wounds. It also included $9.1 billion for the National Nuclear Security Administration, $44.9 billion for Homeland Security, $38.5 billion for the State Department, and $7.7 billion for the FBI. 

    The other reason the budget was DOA was because 2008 was an election year, and Bush's budget cut popular programs, something that wouldn't help any Congressional member's reelection. It cut Medicare, grants to states, and kept all other spending for non-security departments flat. (Source: "$400 Billion Deficit to Greet Bush's Successor," USA Today, February 2, 2008. "Congress and Administration Delay FY 2009 Appropriations," American Institute of Physics, September 30, 2008.  "Monthly Budget Review FY 2009," Congressional Budget Office.)

    Largest Budget Deficit in U.S. History

    The FY 2009 budget deficit was $1.413 trillion, the largest in history.  The deficit came in $1.006 greater than Bush's proposed budget deficit of $407 billion. As you can guess, Republicans blamed Obama, while Democrats blamed Bush. However, the chart below shows where the real blame lies -- the greatest recession since the Great Depression

    Difference Between Proposed and Actual 2009 Budget

    Category  Proposed  ActualUnbudgeted Contribution to Deficit
    Revenue$2.7 trillion$2.105 trillion    $595 billion
    TARP0   $151 billion    $151 billion
    ARRA0   $253 billion    $253 billion
    Other0      $7 billion        $7 billion
    Total------ $1.006 trillion

     

    Deficit spending during a recession is appropriate. It is part of expansionary fiscal policy, which boosts growth. However, it's become a hot button issue because Congress has found deficit spending to be a good way to get reelected ever since President Nixon. Before that, deficits were only run up to finance wars. By the end of FY 2008, the debt had grown to $10 trillion.

    In the long-term, this growing debt weakens the dollar. That's because the Treasury Department must issue new Treasury notes to pay for the debt. This has the same effect as printing dollar bills. As the dollar floods the market, supply outstrips demand, lowering the value of the dollar.

    As the dollar's value decreases, it makes the price of imports rise. A huge debt burden eventually creates the fear that it might not be repaid. Or, that the government will have to raise taxes to pay for it. This acts as a further drag on economic growth. For more, see How the National Budget Deficit Affects the Economy.

    Compare to Other U.S. Federal Budgets