What happened to the 2000 Surplus?

As we entered the new century the 2000 federal budget had an annual surplus of $ 86 billion and the overall deficit was declining at a historically rapid pace. CBO estimated that budget surpluses would exceed $3 trillion over the next ten years and virtually eliminate the remaining deficit by 2010. What happened? How did we move from record surpluses to record deficits? Several factors resulted in a perfect storm to end the surplus and begin the largest growth in the deficit in American history. The recession of 2001–02 resulted in a relatively small cyclical or temporary annual deficit. The wars following 9/11 originally thought by some to be short in nature and cheap in overall cost were not funded, considered a temporary deficit. As the wars dragged on and the military budget grew in the size the temporary shortfalls became long term resulting in a structural deficit. The Bush tax cuts of 2001 and 2003 were never offset by reduced spending, resulting in further structural deficit. Finally the Medicare prescription plan of 2005 was not funded also adding to the structural deficit.

In 2007 we entered another recession that caused the largest economic downturn since the depression. In an effort to shorten the recession President Bush initiated a stimulus program, in the form of tax rebates during the summer of 2008. As the recession worsened, and the housing market collapsed and the credit markets froze, the Bush administration intervened in the fall of 2008 with TARP, commonly known as the bank bail out.  The next year President Obama extended TARP to the auto industry and as the recession worsened passed a $770 billion stimulus composed of roughly 1/3 tax cuts, 1/3 support to local governments and 1/3 to long term green economy. Although the 2007 recession officially ended in 2010, the cyclical loss of revenues added almost $2 trillion to the deficit, which will continue to grow until the economy fully recovers.

To summarize over the last 10 years, the deficit grew by $9 trillion with more than half a structural deficit (e.g. 2 wars, Bush tax cuts, Medicare drug program)  and the remaining temporary or cyclical due to the recession. See the below table which shows order of magnitude changes to the deficit over the last 10 years. If we are to fix the temporary shortfall it will take polices to restore the health of the economy (such as temporary tax reductions and stimulus spending) and to fix the structural portion of the deficit which will require a permanent decrease in spending or permanent increase in revenue.

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