Coronavirus, CARES And PPP Will Explode The Federal Deficit And Debt

The $2 trillion CARES Act and the just signed $484 billion coronavirus relief package, along with the economic impact of COVID-19, will drive the Federal deficit and debt to new heights. The 26 million people who have filed for unemployment insurance claims the past five weeks are creating a “Greater Recession” and driving an unprecedented level of Federal spending.

The Committee for a Responsible Federal Budget or CRFB, a nonpartisan organization, analyzes the Federal budget to “educate the public on issues with significant fiscal policy impact.” Maya MacGuineas, the CRFB’s President, said, “Like the record levels of borrowing undertaken during World War II, a large share of today's massive deficits are both inevitable and necessary in light of the current pandemic crisis. Combating this public health crisis and preventing the economy from falling into a depression will require a tremendous amount of resources – and if ever there were a time to borrow those resources from the future, it is now."

She added, “But just as World War II was followed by years of fiscal responsibility to restore debt to historic levels, it will be important after the crisis and recovery to ensure that debt and deficits return to more sustainable levels.” While that is a worthwhile objective, it is hard to see how that will be achieved under the current political environment.

Deficit could hit $4.3 trillion and over 20% of GDP

The Federal deficit was on track to be over $1 trillion without any additional spending for the coronavirus this fiscal year. Now with the $2 trillion CARES Act, the $484 billion relief package and $134 billion for the Families First Act, the CRFB also estimates that, “nearly $600 billion in additional deficit spending as a result of feedback effects from lower economic output, slower inflation, higher unemployment, and lower interest rates” will occur.   

The CRFB’s analysis included, “These projections almost certainly underestimate deficits, since they assume no further legislation is enacted to address the crisis and that policymakers stick to current law when it comes to other tax and spending policies.” The CRFB estimate was $3.85 trillion without the $484 billion relief bill. All of this cumulates in what could be a $4.3 trillion deficit this fiscal year ending in September.

What could also be of particular concern is that the CRFB also assumes, “the economy experiences a strong recovery in 2021 and fully returns to its pre-crisis trajectory by 2025.”

The Congressional Budget Office published an estimate on Friday that the deficit could be $3.7 trillion in fiscal 2020, which includes the $484 billion bill. Keep in mind that the largest previous deficit was $1.4 trillion during the Great Recession.

A $4.3 trillion budget deficit translates to 20.8% of the country’s GDP. This would be more than double the largest amount during the Great Recession and only be beaten by a few years during World War II.

Debt to hit 100% of GDP and surpass the highest ever recorded

Before the outbreak, the U.S. Federal debt was at 81% of GDP. Unfortunately, an additional $2.5 trillion plus in additional spending along with the economic impact of the coronavirus, will drive the amount of debt to over 100% of GDP by the end of the year. Note that the graph below from the CRFB did not take into account the $484 billion or 2% of GDP impact that was just signed by President Trump.

Sometime during 2020 the CRFB estimates that the Federal debt held by the public will cross $21 billion plus and equal the size of the economy, and that during 2021 it will match and then surpass the 107% threshold that occurred during World War II.