Last Thursday, the Congressional Budget Office (CBO) released their monthly budget summary for the month of September.  A quick glance at the review’s top line numbers might lead one to believe that the FY2010 deficit was $125 billion lower than the FY2009 deficit and that outlays also declined by $67 billion.   The numbers are accurate, but they do not tell the entire story.  Rather, the headline figures create the impression of an improving budget situation when the situation actually deteriorated.

 The TARP Distortion

The past two years witnessed an unprecedented intervention in the economy by the Federal Reserve, the Treasury and the federal government at large.  Perhaps the single greatest “distorting” factor is the Troubled Asset Relief Program (TARP) enacted just over two years ago.  While there are other “distorting” factors like GSE conservatorship, increased FDIC payouts, and increased payments to the Treasury by the Federal Reserve, TARP ranks first in terms of the ease with which you can quantify its impact on the top line budget estimates.

When the Federal Government disbursed TARP money, it was counted as outlays.  When TARP money is paid back it is NOT counted as revenue, but as a reduction in outlays.  The table below illustrates where the Federal Budget numbers would stand if you net out the TARP activity.

The table shows that if TARP is excluded from the results, spending was up 5.8% in FY 2010, not down 1.9%.  And the deficit would not have registered a decline of 8.8% (-$125 billion), but rather an increase of 10.9% (+$262 billion).

Additionally, the two charts below show the impact of including or excluding TARP on the level of outlays and the deficit in FY 2009 and 2010.