Record $3.3 trillion deficit fueled by COVID-19 response, recession

The amount of debt held by the U.S. government will roughly equal the size of the entire American economy, as the nation’s fiscal imbalance surges in response to the coronavirus pandemic, the nonpartisan Congressional Budget Office said Wednesday.

By the end of 2020, the amount of debt owed by the U.S. will amount to 98% of the nation’s Gross Domestic Product, the highest level since the end of World War II, the CBO said. Total government debt will surpass the U.S. economy’s size next year, CBO said.

Fueling this rise is a big jump in the government’s annual budget deficit, which is projected to widen to $3.3 trillion by the end of this fiscal year, more than tripling since 2019. The deficit was already on track to be very elevated because of recent tax cuts and spending increases, but the government’s response to the pandemic changed things markedly.

The surge in federal spending this year is primarily responsible for the much higher federal deficit, the CBO said. Congress has approved more than $3 trillion in new spending since March to combat the outbreak and subsequent economic downturn, approving hundreds of billions in aid for businesses and the unemployed.

The annual federal deficit in 2020 is expected to equal roughly 16% of the nation’s GDP, which would be the largest amount since 1945. Policy makers have often tried to bring the deficit down below 3%, though Republicans frequently say they want to eliminate the deficit altogether.

As the coronavirus pandemic hit the U.S. economy earlier this year, tax revenues fell as business activity slowed down. In an attempt to give households and businesses more flexibility, the Trump administration and

Congress delayed payment of numerous tax obligations. Individual income taxes dropped by about $200 billion, according to the CBO’s projections, while corporate income taxes fell by about $80 billion.

The bigger change came on the spending side. The U.S. government is on pace to spend roughly $6.6 trillion in the fiscal year that concludes at the end of this month, an approximately $2.2 trillion increase from the year before, the CBO said. The largest new spending obligations came from the CARES Act approved by Congress in March, which directed more than $500 billion for the Paycheck Protection Program aimed at small businesses, as well as hundreds of billions in pandemic unemployment compensation and $1,200 stimulus payments to tens of millions of American households.

Some experts saw the projected rise in the national debt as a cause for concern, even though most also say Congress should remain focused on avoiding a recession or a prolonged economic slump.