The federal budget deficit hasn’t received a lot of press lately, what with all the worries about the U.S. financial system, the home mortgage market, and the rescues that might be necessary to save both.  In fact, it’s a bad sign, since the Bush administration and the Democrats in Congress have joint responsibility for keeping the budget deficit under control, so they would both be crowing about it if they were doing a good job.

We already know the budget deficit is going to return to the $400 billion level - actually $410 billion - in Fiscal 2008, which ends in September. But what is only just now becoming clear is that the $410 billion figure is likely to mark a trough, not a peak, and that a budget deficit of $1 trillion is likely as early as Fiscal 2009 or Fiscal 2010.

The main reason for the probable swing in the deficit is the current period of slow growth and the impending recession.

For example, 2001-02 was a recession but a pretty wimpy one that lasted from March to November 2001. In August 2001 - well into the recession, and after the 2002 budget had been thoroughly debated - the mid-session budget review projected that 2002’s budget would show a surplus of $173 billion. In reality, only 14 months later, the final figure for 2002 showed a deficit of $304 billion, a swing of $477 billion, or 4.5% of gross domestic product (GDP). Add 4.5% of a $15 trillion GDP to Fiscal 2009’s projected $407 billion deficit and you get a deficit of $1.082 trillion. Thus a trillion-dollar deficit is certainly possible without even assuming an administration or Congress go mad, or a re-run of the Great Depression.

The main factor that has made this year’s budget deficit outcome relatively benign, in spite of the $150 billion in tax rebates, is the huge revenue boost from bonuses and capital gains, most of which are received in April. In April 2008, revenue was $404 billion, 16.0% of expected total revenue for the year. That was a new record, not only in amount (which you might expect), but also as a share of the year’s total revenue - the previous record was April 2001, when revenue was 15.5% of the total for the year.

Note that 2007’s stock market gains and Wall Street bonuses were bigger relative to the U.S. economy than those of 2000, the previous record holder, and also that there is a lag between the market turning down (and bonuses beginning to diminish) and tax revenues falling off. The stock market peaked in March 2000, yet it was in 2002-04, not in 2001, that we saw a sharp drop-off in April’s revues as a share of the year’s total.