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Federal Deficits, Growing Debt, and the Economy in the Wake of COVID-19

CRS – Federal Deficits, Growing Debt, and the Economy in the Wake of COVID-19, March 23, 2021: “The Coronavirus Disease 2019 (COVID-19) pandemic caused a swift and deep economic downturn from which the country has yet to fully recover. In response to COVID-19, the federal government enacted expansionary fiscal policy to provide relief and stimulus to the economy. Several bills were enacted in FY2020, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). The FY2020 federal budget deficit totaled $3.1 trillion, more than triple its FY2019 value,and the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) project the bills enacted in FY2020 to increase FY2020-FY2030 deficits by $2.6 trillion. Additional relief and stimulus was enacted in FY2021 in the Consolidated Appropriations Act, 2021 (P.L. 116-260), which CBO and JCT estimate would increase deficits by $1 trillion over the 2021-2031 period, $868 billion of which comes from COVID-19 related provisions. This was followed by the American Rescue Plan Act of 2021 (P.L. 117-2), enacted on March 11, 2021, which CBO and JCT estimate will increase deficits by nearly $2 trillion over the 2021-2031 period. CBO projects the FY2021 deficit to be 10.3% of gross domestic product (GDP). To finance these deficits, the government needs to borrow money. The federal debt-to-GDP ratio rose significantly in FY2020, reaching slightly above 100%. CBO projects that deficits and debt will trend upwards in the coming decades, with the debt-to-GDP ratio surpassing 200% by 2051under current policy. The current and projected size of deficits and the rising debt-to-GDP ratio are a topic of concern for many economists and policymakers given that FY2020 deficits and debt as a share of GDP were the largest on record since World War II. Some of the possible consequences of persistent deficit spending include the crowding out of private investment, which can in turn stunt long-term growth;increasingly large portions of the federal budget being directed toward interest payments on debt, which can crowd out other policy priorities;and an unsustainable level of debt, which can lead to a fiscal crisis. Several economic factors are important for the sustainability of incurring debts, including interest rates, inflation, and the growth rate of real GDP. Both long-and short-term interest rates are relatively low from a historical perspective, and the Federal Reserve has indicated its intention to keep rates low for the time being, inflation has generally been below 2% for the past decade,real GDP growth has been smaller in recent decades,and real GDP fell by 3.5% in 2020 as a result of COVID-19. These are all relevant to the government’s ability to service its debt and continue borrowing as needed. ..”

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