CBO Projects Record Setting $3.7 Trillion Deficit in FY2020 - Are You Worried About the Debt?

What’s the story?

• The Congressional Budget Office (CBO) is projecting that the U.S. government will run a $3.7 trillion budget deficit for fiscal year 2020 due to the coronavirus (COVID-19) pandemic, which would be the largest budget deficit in history and exceed the $1.4 trillion deficit in FY2010. 
• A $3.7 trillion deficit in FY2020 would drive federal debt held by the public to 101% of gross domestic product (GDP) ― its highest level since its all-time high of 106% in 1946 when the U.S. was in the process of demobilization after the end of World War II.
• The projection comes amid a sharp economic contraction & decline in tax revenue caused by government-imposed shutdowns of businesses that are aimed at slowing the spread of coronavirus; and massive federal spending aimed at providing relief to people put out of work by the shutdowns.
• The CBO includes the caveat that its projections at this time are “subject to enormous uncertainty” and “incorporate an expectation that the current extent of social distancing across the country will continue ― on average and with regional variation ― through June.” The CBO analysis was published April 24th.

How much has the pandemic increased federal spending?

• Congress and the Trump administration have thus far enacted four pieces of legislation related to the COVID-19 pandemic.
• “Phase 1”: The Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 was estimated by the CBO to increase spending by about $7.6 billion over the next decade. It provided funding for acquisition of medical supplies, plus the development of COVID-19 vaccines & treatments. 
• “Phase 2”: The Families First Coronavirus Response Act was estimated by the CBO to increase deficits by about $192 billion over the next decade (mostly in FY2020 & FY2021). It provided for free COVID-19 testing, paid leave under certain circumstances, and expanded food aid & unemployment insurance during the pandemic.
• “Phase 3”: The Coronavirus Aid, Relief, and Economic Security (CARES) Act was estimated by the CBO to increase deficits by about $1.715 trillion over the next decade. It provided direct cash payments to most Americans & enhanced unemployment benefits; forgivable loans for small businesses; interest-bearing financial aid for larger distressed corporations; and funding for hospitals & healthcare providers.
• “Phase 3.5”: The Paycheck Protection Program and Healthcare Enhancement Act was estimated by the CBO to increase spending by $483 billion over the next decade. It provided additional funding for forgivable small business loans, financial aid for hospitals & healthcare providers, in addition to funding for COVID-19 testing & tracing capacity.

How much was the federal government projected to spend before the pandemic?

• Mandatory Spending: The CBO estimated the federal government would have $2.859 trillion in mandatory spending for FY2020, including $1.327 trillion on Medicare, Medicaid, and related programs plus $1.094 trillion on Social Security. An additional $382 billion in net interest costs were projected for servicing the existing national debt. The CBO has previously identified mandatory spending as the main driver of increasing federal deficits despite tax revenues reaching an all-time high in 2019.
• Discretionary Spending: The CBO estimated discretionary spending would total $1.406 trillion in FY2020. Congress enacted legislation to allow all other federal programs to spend a total of $1.371 trillion during FY2020 based on the caps established by the Bipartisan Budget Act of 2019.
• Previous Deficit Projection: The CBO’s initial deficit projection for FY2020 was $1.015 trillion.

— Eric Revell

(Photo Credit: iStock.com / lucky-photographer)