As More Americans Become Poorer, the Government Must Spend More Money

by Gary Therkildsen*, 8/27/2009

Following up on my and Craig's recent posts on the OMB and CBO updated economic outlooks released on Tuesday, the Bureau of National Affairs (subscription required) ran a piece yesterday further exploring the effects of the sagging economy on spending and deficit projections, which are often overlooked in the heated debates over this issue.

Unemployment Line

As Director Peter Orszag points out in a recent blog, OMB increased its projections for the national debt in 2019 by $2 trillion because of a worse-than-foreseen economy. When a bad recession turns worse, more people lose their jobs – the unemployment rate is now projected to top 10 percent next year and is not expected to dip below 5 percent before 2014 – and the government must shell out more for unemployment insurance and food stamps all while receiving less in tax revenues.

Moreover, as the BNA article highlights, the slumping economy pushes more people down into income levels that qualify them for earned income tax credits, dramatically increasing the cost of those credits. According to OMB, total federal spending on seven refundable tax credits, including the child tax credit and the saver's credit, will increase by $34 billion over the next 10 years. Of course, the hope is that the tax credits – along with unemployment insurance and food stamps – will help these recently poorer individuals get by during tough times. As the revised debt estimates demonstrate, though, unanticipated costs can have staggering consequences on long-term projections.

Image by Flickr user "SIR: Poseyal : KNIGHT of the DESPOSYNI used under a Creative Commons license.

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