The U.S. budget deﬁcit may quadruple this year to almost $4 trillion. Projections from the Committee for a Responsible Federal Budget (CRFB) say that by 2023 U.S. debt held by the public will surpass records set in the post-World War II years.
And these projections only include spending enacted so far—in a three-month-old crisis that has seen emergency Congressional appropriations top $2.3 trillion. Additional spending is almost certain as the coronavirus pandemic destroys millions of jobs and thousands of businesses while slashing tax revenues for local and state governments.
Even before the crisis, U.S. debt-to-GDP had more than doubled to 79% in 2019 from 35% in 2007. Deﬁcit hawks, already hard to find, disappeared once the virus shut down whole swaths of the U.S. economy. The Coronavirus Aid, Relief, and Economic Security (CARES Act) legislation passed on a unanimous voice vote. Lawmakers understood that frugality made no sense in the face of impending economic collapse.
Not all the stimulus is gone for good. About 20% of the CARES Act spending, $454 billion, will be used to backstop lending from the Federal Reserve—possibly more than $4 trillion. The loans are aimed at keeping financial markets functioning, as well as helping companies and local governments survive the crisis. The loans are backstopped by capital provided by the Treasury.
If any of those loans go bad, losses will be absorbed by the backstop, but the Fed’s lending will also generate interest income. That means the central bank could end up returning more than $454 billion to the Treasury by the time the emergency lending is unwound. Similar programs during the global financial crisis of 2007-09 turned a profit.
Still, the U.S. is destined for much higher levels of debt when the contagion passes. In a worst-case scenario, the CRFB predicts debt could reach 117% of GDP by 2025, easily exceeding the record of 106% set in 1946. That won’t represent an immediate threat because interest rates are so low. The Treasury can borrow cheaply. The challenge will be to rekindle the economy so that, like after World War II, the debt can be conquered through growth instead of austerity. But should inflation awaken from its long slumber and force interest rates higher before growth revives significantly, the weight of rising debt could become crushing.