Over on Capital Gains and Games (a favorite blog of the Budget Brigade), budget guru Stan Collender and Pete Davis muse, in a couple of posts, on the presidential candidates' budget plans. They emphasize the point that, as much as they may want to implement deficit-increasing tax and/or expenditure plans, the market may have other plans.

First, Collender reminds us that in the post-Reagan world, economic policy options were limited.

The bond market "vigilantes" -- the same people who forced the Clinton administration to propose and push for deficit reduction -- are starting to say that the moon, stars, and planets may line up again in 2009 to force the next president to do the same thing.

In a follow-up post, Davis explains how large, persistent deficits impact the economy. This may give the next president pause (Davis hopes) and put the kibosh on his plans.

High real interest rates choked off recovery from the 1980 recession until early 1983, and real growth turned down again in 1986, but stopped short of a recession. The first chart [shown] also shows the "neutral real rate" required to keep the economy at full production. With the credit crisis, it has moved negative, where it remains today. It will take us at least another year or two to come out of our economic "slowdown," and rising interest rates could easily choke that recovery off.

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The Congressional Budget Office (CBO) released their monthly budget review this morning. CBO Director Peter Orszag blogged on the release of the review on the CBO Director's Blog:

CBO estimates that for the first 10 months of fiscal year 2008, the federal budget deficit was about $371 billion—$213 billion more than the deficit recorded over the same period in 2007. While revenues were about 1 percent lower than in the same period last year, outlays over the same period have grown by almost 9 percent. CBO estimates that the federal budget deficit for fiscal year 2008 will be in the vicinity of $400 billion, close to the amount we projected last March after accounting for proposed supplemental appropriations.

CBO estimates that a deficit of $102 billion was recorded for ythe month of July, about $65 billion more than recorded in July 2007; approximately $14 billion of that increase was due to rebate payments resulting from the Economic Stimulus Act of 2008. Receipts were about $5 billion lower than those in July 2007; without the rebates, receipts would have been up by 2 percent. Outlays in July were $61 billion higher than in the same month last year; about $21 billion of that difference was the result of calendar-related shifts in the timing of certain payments. Another major factor contributing to the increase was the $15 billion disbursed in July 2008 by the Federal Deposit Insurance Corporation (FDIC) to cover insured deposits at failed financial institutions; much of that cost should be recovered in the future as the FDIC liquidates the assets held by those institutions and collects higher insurance premiums.

CBO: Monthly Budget Review

The fiscal health of states around the country is continuing to deteriorate, according to an updated report from the Center on Budget and Policy Priorities. CBPP has issued updates to this report, initially released on January 15 this year, as state legislatures have attempted to deal with their budget shortfalls during the FY 2009 state budget process. This will be the last update of this report as only two states are left without an enacted FY 2009 budget.

The latest update from CBPP notes that 29 states and the District of Columbia had to deal with budget gaps this year, totaling $48 billion. The CBPP report summarizes their research findings:

• Over half of the states have faced problems with their FY2009 budgets.
• The 29 states in which revenues were expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arkansas, Arizona, California, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia closed a shortfall in fiscal year 2009. The budget gaps totaled $47.6 to $49.2 billion, averaging 9.3 percent to 9.7 percent of these states' general fund budgets. (See Table 1.) California — the nation's largest state — faced the largest budget gap. The shortfalls that states other than California faced averaged 6.2 percent to 6.7 percent of these states' general fund budgets.
• Analysts in three other states — Missouri, Texas, and Washington — are projecting budget gaps a little further down the road, in FY2010 and beyond.

This brings the total number of states identified as facing budget gaps to 32 — close to two-thirds of all states. Most states have addressed the FY2009 budget gaps identified here. However, new budget gaps in these and other states are likely to develop as state revenue forecasts are updated during the year.