WASHINGTON – By the end of the year, for the first time since World War II, the U.S. government’s debt will roughly equal the size of the American economy, the nonpartisan Congressional Budget Office said Wednesday.
The rapid change is largely because of the surge in new spending that the government has authorized as it tried to control the economic impact of the coronavirus pandemic.
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 Congressional Budget Office (CBO) said. That’s up from 79% last year. Total government debt will surpass the U.S. economy’s size next year, the report 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 triple its level in 2019. The deficit was on track to be high because of recent tax cuts and spending increases, but the government’s response to the pandemic expanded that gap significantly.
The government typically spends more than $4 trillion a year on programs and services; Congress has approved more than $3 trillion in emergency funding since March to combat the outbreak and subsequent economic downturn. This included hundreds of billions of dollars in aid for businesses and the unemployed.
During the Obama administration, many Republicans campaigned aggressively on promises to shrink or eliminate the budget deficit, but President Donald Trump has shown little interest in such an approach since taking office in 2017. Before the coronavirus pandemic, he told aides that he would seek to address the budget deficit in a second term, if elected, but in recent months he has called for more spending and tax cuts.
Other members of his party have become cooler to the idea of additional spending. The rising deficit has affected negotiations over whether to approve additional coronavirus spending. Many Republican members of Congress and some White House officials have balked at the idea of approving another $2 trillion to strengthen the economy, though Democrats have said such aid is necessary to help jobless people, cities, states and others.
The deficit has not yet emerged as a major issue in the 2020 presidential election. The imbalance probably will influence debates over the proper size of government next year. The deficit could continue to grow if Congress approves another round of emergency spending, such as sending new stimulus checks to households.
Few policy experts believe 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.”
The annual federal deficit in 2020 is expected to equal about 16% of the nation’s gross domestic product, which would be the largest amount since 1945. Policymakers have often tried to bring the deficit down below 3%, though Republicans have said in the past that they would seek to eliminate the deficit altogether by slashing spending.
The coronavirus pandemic hit the U.S. economy earlier this year, and tax revenue fell as business activity slowed down and many Americans lost their jobs. In an attempt to give households and businesses financial relief, 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, which became law in March and directed more than $500 billion for the Paycheck Protection Program aimed at small businesses, as well as hundreds of billions of dollars in pandemic unemployment compensation and $1,200 stimulus payments to tens of millions of American households.
Some experts are concerned about the rise in the national debt, though others say Congress should remain focused on avoiding a recession or a prolonged economic slump.
The historically low interest rates, the result of extraordinary 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, said Brian Riedl, a budget expert at the libertarian-leaning Manhattan Institute.
“While Congress must focus on addressing the pandemic and recession, the projected doubling of the national debt through 2030 should scare taxpayers,” Riedl 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 Treasury Secretary Steven Mnuchin, have said the U.S. should take advantage of the low interest rates, which make federal spending cheap. Despite massive spending increases, the CBO report found virtually no change to 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.
It is unclear whether either major political party is planning a serious push to reduce the deficit. In 2017, the GOP approved tax cuts that are projected to reduce government income by more than $2 trillion over the next decade. Republicans also agreed to more than $3 trillion to fight the pandemic earlier this year, when the pandemic’s economic impact appeared most severe.
Total U.S. government debt is now more than $20 trillion. By the end of the decade, the CBO says, that number is projected to rise above $33 trillion. In 2013, when federal debt was substantially lower, Trump tweeted: “Obama is the most profligate deficit & debt spender in our nation’s history.” Vice President Mike Pence and other Trump administration officials criticized debt levels under the Democratic administration.
Since approving the Cares Act in March, congressional Republicans have again raised concerns about the nation’s spending obligations. 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.
The fiscal priorities for Democrats next year are less clear. During the Democratic presidential primary, former vice president Joe Biden called for trillions of dollars in new spending but outlined plans to pay for his proposed government expansions through tax increases. Biden has since endorsed House Democrats’ Heroes Act, which would authorize $3 trillion in more spending and would not include tax increases.
During a campaign speech Wednesday, 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.”