Northwest Arkansas Democrat-Gazette
Forecast for U.S. deficit at a record
$3.3 trillion tally triple ’19 amount
WASHINGTON — The federal budget deficit is projected to hit a record $3.3 trillion as government expenditures to fight the coronavirus and to prop up the economy have added more than $2 trillion to the federal ledger, the Congressional Budget Office said Wednesday.
The spike in the deficit means that federal debt will exceed annual gross domestic product next year — a milestone that would put the U.S. where it was in the aftermath of World War II, when accumulated debt exceeded the size of the economy.
The $3.3 trillion figure is more than triple the 2019 deficit and more than double the levels experienced after the market meltdown and recession of 2008-09. Government spending, fueled by four coronavirus response measures, would register at $6.6 trillion, $2 trillion-plus more than 2019.
The recession has caused a drop in tax revenue, but the changes are not as dramatic as seen on the spending side, with individual income tax collections running 11% behind last year. Corporate tax collections are down 34%.
The economy shut down in the spring so people could go into isolation in a national attempt to ward off a pandemic. That shutdown led lawmakers and President Donald Trump to pump money into business subsidies, higher unemployment benefits, $1,200 direct payments and other stimulus steps that have helped the economy in the short term.
Most economists are untroubled by such large borrowing when the economy is flagging, and the debt was barely a concern when a $2 trillion coronavirus relief bill passed almost unanimously in March.
But now that lawmakers and the White House are quarreling over the
size and scope of a fifth virus-relief bill, Republicans are growing skittish over the costs of battling the pandemic. The Democratic-controlled House passed a $3.5 trillion measure in May, though House Speaker Nancy Pelosi, D-Calif., says she is willing to cut that figure to $2.2 trillion.
Virus cases remain unacceptably elevated, however, exacting a lingering toll on the economy, and sentiment remains high for a fifth virus rescue package that would include money to reopen schools, patch state budgets and continue enhanced jobless benefits that have kept families afloat.
PARTY DIVIDED
The concerns among conservative lawmakers have complicated an effort by Senate Majority Leader Mitch McConnell, R-Ky., to unify his party around an additional stimulus package, despite bipartisan agreement and support from the White House for another bill. He is expected to propose a new spending package that would be less than $1 trillion, substantially lower than what Democrats have demanded.
“I don’t know if there will be another package in the next few weeks or not,” McConnell said at an event at a hospital in his home state of Kentucky. He said talks between top administration officials and Pelosi haven’t been fruitful, and any embrace of bipartisanship in the Capitol has “descended” as the fall elections near.
His comments come a day after Treasury Secretary Steven Mnuchin testified to Congress that parts of the U.S. economy urgently need additional fiscal stimulus to fully weather the covid-19 crisis. Mnuchin told a House panel that the most important thing is “that we deliver some relief quickly to the American workers impacted by this.”
In a statement Tuesday night, the speaker said she told the Treasury chief that Democrats have “serious questions” remaining in any negotiations. That includes, she said, the view of the administration that a smaller package can be pursued now and a larger one later.
During a campaign speech Wednesday, Democrat presidential nominee Joe Biden said one reason there is gridlock in Washington is because a number of congressional Republicans will not approve new policies that might add to government borrowing levels.
“The reason why they can’t get anything done in the Republican Congress is 20 members of the United States Senate say, under no circumstances, will they raise the deficit at all,” Biden said. He added sarcastically, “Well that’s wonderful.”
FEDERAL DEBT
The deficit is taking the federal debt, as measured by the size of the economy, near levels not experienced since the end of World War II, when borrowing to finance the war effort caused a historic spike. But those levels quickly receded during the postwar boom — something that some say won’t happen now, since federal spending is now dominated by retirement programs like Medicare and Social Security, whose costs increase automatically with inflation, and the ongoing retirement of the Baby Boom generation.
Deficit opposers have long warned that rising levels of debt will drag down the economy in the coming years. If interest rates rise too high, servicing the debt will put a strain on the budget, they say. The Federal Reserve has stepped in to keep credit markets stable and interest rates low for years as debt levels have risen.
“At a certain point, Washington’s insatiable borrowing needs will crowd out other investments and harm growth,” said Brian Riedl, a senior fellow at the conservative Manhattan Institute. “Washington should help end the pandemic and rescue the economy, yet must also address these unsustainable long-term deficits.”
By year’s end, the publicly held national debt is projected to total 98% of the U.S. gross domestic product, the total output of goods and services. That compares with 79% of GDP at the end of 2019 and 35% back in 2007.
The Congressional Budget Office projected that the debt will exceed 100% of GDP in 2021 and set a new record of 107%.
The budget office, the nonpartisan economic and research arm of Congress, predicts that the deficit will total $13 trillion over the coming decade.
The deficit has not yet emerged as a major issue in the 2020 presidential election.
INFLATION IN CHECK
Few policy experts believe that Congress will do anything to reduce the deficit in the short term, particularly while unemployment remains near 10%. Interest rates are low, which makes it less costly for the federal government to borrow. And inflation — one of the principal concerns about higher deficit spending — largely has remained in check.
“It will be hard to ratchet down this spending going forward, and we are going to be entering a long stretch of deficits well above historical averages,” said William Hoagland, a senior vice president at the Bipartisan Policy Center and former Republican staff director for the Senate Budget Committee. “But as a matter of national politics, the deficit was not a matter of concern before the pandemic, and it won’t be after.”
While some experts are concerned about the rise in the national debt, others say Congress should remain focused on avoiding a recession or a prolonged economic slump.
The historically low interest rates, the result of interventions by the Federal Reserve, may help mask the cost of the spending surge. A spike in interest rates over the next decade could send the deficit soaring and make it difficult to get federal spending under control, Riedl said.
“While Congress must focus on addressing the pandemic and recession, the projected doubling of the national debt through 2030 should scare taxpayers,” he said.
Other economic experts emphasize that lawmakers should remain focused on fighting unemployment and ensuring that Americans can afford to eat. White House officials, such as Mnuchin, have said the U.S. should take advantage of the low interest rates, which make federal spending cheap.
Despite the spending increases, the budget office report found virtually no change in the 10-year deficit impact because low interest rates are alleviating the costs of new spending.
“The numbers I’m more concerned about are the swaths of families unable to pay rent or put food on the table, and Congress should be working to decrease those instead of the deficit,” said Elizabeth Pancotti, an economic expert at the left-leaning group Employ America.
Except for a brief period 20 years ago, the U.S. government typically has spent more money than it brings in through revenue. This gap between spending and tax revenue is called the budget deficit. To spend more money than it collects, the Treasury Department issues government debt.
Total U.S. government debt is now more than $20 trillion. By the end of the decade, the Congressional Budget Office says, that number is projected to rise above $33 trillion.
Accumulating deficits add to the overall federal debt, which totaled nearly $26.7 trillion as of Monday. That figure includes more than $6 trillion that the government owes itself, including about $2.9 trillion borrowed from the Social Security Trust Fund, according to Treasury Department reports.