CBO: U.S. debt to exceed size of economy before Biden stimulus is approved
— The federal government’s total debt is expected to exceed the size of the American economy this year, a figure that does not take into account President Joe Biden’s proposed $1.9 trillion stimulus package, the nonpartisan Congressional Budget Office said Thursday.
Still, the CBO said that the annual federal deficit — the difference between what the government spends and what it collects in tax revenue every year — is set to decline from the year before, when the deficit surged due to the historic emergency measures authorized to support an economy pummeled by the coronavirus pandemic.
In 2021, America’s federal debt will reach about 102% of its gross domestic product, a slight increase from the year before. Even without additional spending or tax cuts, that number is expected to grow to 107% of GDP by 2031 — which would be an all-time high in American history, the CBO said.
The CBO’s debt projections are sure to reinvigorate the ongoing debate over Biden’s stimulus proposal, as Republicans try to argue that the U.S. faces unsustainable debt burdens after spending more than $4 trillion in response to the virus.
The projections also come one day after Federal Reserve Chair Jerome Powell warned of continued high unemployment and downplayed the imminent danger of inflation, projections Democrats cheered as boosting their case for more emergency relief. House Speaker Nancy Pelosi, D-Calif., quoted from Powell’s remarks extensively at her news briefing Thursday.
America’s economic recovery from the coronavirus has sputtered as the pandemic raged across the country this winter. Alarmingly, job growth in the U.S. has all but stalled out even as about half of the 22 million jobs lost during the crisis have returned.
“The deficit has been expanding since the pandemic for entirely good reasons,” said Ernie Tedeschi, who served as an economist at the Treasury Department under President Barack Obama. “Any goal of fiscal sustainability in the long term has to start with recovery from the economic catastrophe right now and over the next couple of years.”
The CBO projects that higher levels of vaccinations will dramatically reduce the number of coronavirus cases. As a result, the budget office projects that economic growth will quickly return to its pre-pandemic level by as soon as the middle of 2021. The CBO projects that GDP will increase by close to 5% in 2021, after contracting by 3.5% in 2020, before leveling off at an annual rate of growth of above 2%.
The CBO also estimated the federal unemployment rate would return to its pre-pandemic level by 2024. Separately, the CBO also projects a steady rise in income and corporate tax receipts throughout the decade.
But CBO’s projections face the extreme uncertainty of the unprecedented situation facing the American economy. The rollout of the coronavirus vaccine has proven uneven at times, and fears have mounted about new variants of the virus and their effect on the nation’s pandemic response and economic recovery more generally.
“There are so many uncertainties: about the vaccine; about when people come back to work; about what this looks like on the other side — and the standard way of CBO presenting their thinking does not have a framework for quantifying those risks,” said Claudia Sahm, an economist who worked at the Federal Reserve. “And that’s a big problem right now because people are basing their policy advice on these numbers.”
CBO’s projections suggest that debt levels will remain historically high even with a largely successful economic rebound. The federal deficit will average about $1.2 trillion annually from 2022 to 2031, according to CBO’s projections.
The annual deficit is expected to decline by nearly $900 billion compared to 2020. The U.S. budget gap breached $3.1 trillion in 2020 due primarily to the trillions in new spending approved by Congress in response to the pandemic. Another $1.9 trillion in deficit spending, as Democrats are pushing, would likely push America’s fiscal imbalance above its 2020 levels.
Yet, the new CBO estimates do not incorporate Biden’s proposal to spend another $1.9 trillion to help get the recovery back on track and are sure to embolden Republicans who have been warning against more spending.
“Congress has already allocated more than $4.5 trillion to address this crisis,” Sen. Rick Scott, R-Fla., said in a recent attack on Democrats’ proposal to spend $350 billion in aid for state and local governments. “Democrats need to return to reality (and) remember their obligation to the American taxpayer.”