Yesterday, Gary wrote about the latest federal budget deficit numbers and noted that, well, there's no need to freak out. Aside from freaking out, understanding how the federal budget got to this level is essential to evaluating budgetary policy options going forward.

A new report by John Irons, Katheryn Edwards, and Anna Turner of the Economic Policy Institute, The 2009 Budget Deficit—How did we get here?, analyzes the causes of past and current budget deficits and finds that the Recovery Act is responsible for a less than 10% of the $2 trillion change in the deficit.

• In 2001, the federal budget was in surplus by $281 billion (2.8% of GDP). Further, the CBO estimated surpluses would continue through 2010 in their baseline projection....In 2009 the most recent forecast is for a federal budget deficit of $1.67 trillion (11.9% of GDP) — though further economic deterioration may increase this total.
  
  
• Of this $2 trillion reversal of fortune, almost half (42%) was due to legislative changes made prior to 2009 (the Bush-era tax cuts explain about a third of these legislative influences), 42% was due to economic and technical factors — a reflection of the recession’s effect on the deficit — just since the start of the current recession, while only 7.6% can be accounted for by the American Recovery and Reinvestment Act (ARRA).
  
  
• Since 2007, before the recession began, the CBO baseline projection for fiscal year 2009 has deteriorated by $1.5 trillion, or 10.9% of GDP.
  
  
• Of that change, the largest share can be attributed to the mechanical effects of the recession on taxes and spending, as well as the explicitly short-term policy responses to it: 45% of the $1.5 trillion change was due to economic or technical factors (which include subsidies for Fannie Mae and Freddie Mac); 21% was due to non-recovery act legislative changes; 22% was due to the Troubled Assets Relief Program (TARP); and 12% was due to the American Reinvestment and Recovery Act.

The report concludes that it would be a mistake to curtail government deficit spending directed at moving the economy along.

Given the dire economic situation, the very large increase in the federal budget deficit of the past year and a half is both unavoidable and economically necessary. It is unavoidable because most of the recent deterioration is due to a drop in revenue... which is primarily a result of the economic downturn. It is necessary because, in order for the federal government to decrease the deficit, it would be forced to enact counterproductive funding cuts or to raise revenues at an economically vulnerable time....The top priority going forward — from a budgetary perspective — should be to spur the economy.

(click to enlarge)