U.S. Budget Gap Tripled to Record $3.1 Trillion in Fiscal 2020, Treasury Says

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WASHINGTON—The U.S. budget deficit tripled to a record $3.1 trillion in the fiscal year that ended Sept. 30 as the government battled the global coronavirus pandemic that plunged the country into a recession, has taken more than 217,000 American lives and thrown millions out of work.

As a share of economic output, the budget gap in fiscal year 2020 hit roughly 16.1%, the largest since 1945, the Treasury Department said Friday, when the country was financing massive military operations to help end World War II.

Federal debt totaled 102% of gross domestic product, the first time it has exceeded the size of the economy for the full fiscal year in more than 70 years, according to estimates from the Committee for a Responsible Federal Budget. That has put the U.S. in a league with Greece, Italy and Japan among the most heavily indebted nations.

Senate Republicans, citing the mounting debt, have balked at a White House proposal to spend another $1.88 trillion and House Democrats’ $2.2 trillion bill to add to aid to counter the steepest economic downturn since the Great Depression. Many economists and Federal Reserve officials argue restoring growth should be the first priority, and that worries about closing the deficit can come later.

“Unprecedented times call for unprecedented deficits,” said William Hoagland, senior vice president at the Bipartisan Policy Center, a centrist Washington think tank. “Today’s deficit figure is the result of six months of fighting the pandemic and its economic fallout.”

The International Monetary Fund this week said global public debt is likely to approach a record 100% of output but urged policy makers to maintain spending to help vulnerable groups and promote a strong recovery. The IMF said the global recession won’t be as deep as it projected earlier, thanks in part to massive deficit spending by advanced and major emerging-market economies.

“The IMF’s message from these meetings is clear: Avoid premature withdrawal—pulling the plug too soon risks serious, self-inflicted harm,” Managing Director Kristalina Georgieva told reporters Thursday as finance ministers and central bankers assembled virtually for the annual meetings of the fund and the World Bank.

To cover the budget shortfall, the Treasury has sold a flood of new securities, boosting total government debt held by the public to $21 trillion, a 25% increase from the beginning of the fiscal year.

Investors have shown scant worry about the deficit. U.S. government bonds were little changed Friday, with the yield on the benchmark 10-year Treasury note ticking up to 0.743% from 0.730% Thursday, according to Tradeweb. Yields rose in the morning following better-than-expected retail sales data but fell after a disappointing report on industrial production.

Federal revenue totaled $3.4 trillion, Friday’s Treasury report showed, down 1% from the previous year, with much of that occurring since March, when the virus began spreading across the country. Spending rose 47% to a record $6.5 trillion as the government distributed emergency loans for small businesses, enhanced jobless benefits and stimulus payments for American households.

Unprecedented relief spending—the bulk of which was enacted in the $2.2 trillion Cares Act in March—helped keep households and businesses afloat during the early months of the downturn, boosting incomes and bolstering consumer demand. With more than 10 million people still out of work, however, there are signs that the recovery’s momentum is slowing as federal aid programs expire.

U.S. federal debt is projected to exceed 100% of U.S. gross domestic product in the 2021 fiscal year. WSJ’s Gerald F. Seib highlights three reasons why the U.S. is headed toward a milestone not seen since World War II. Photo: Stefani Reynolds/Bloomberg News (Originally published Sept. 2, 2020)

There is little evidence the U.S. is approaching the limit of its ability to borrow. Investors are eager to keep buying Treasury debt that is considered to be ultra-safe, holding interest rates near historic lows, and inflation has barely budged. That has translated to lower debt-servicing costs for the government, which declined 9% last year from a year earlier, the Treasury said.

“There’s no sign of alarming pressure from these deficits anywhere in our economy,” said Wendy Edelberg, director of the Brookings Institution’s Hamilton Project and a former Congressional Budget Office chief economist. “We don’t see the pressure in interest rates, we don’t see the pressure in inflation expectations.”

Deficits typically widen during economic downturns, but they have been climbing in the U.S. for the past five years, despite sturdy economic growth. The annual budget gap was on track to exceed $1 trillion this year even before the pandemic, following Republican tax cuts enacted in 2017 that constrained revenues and two bipartisan budget deals that boosted spending.

Up until March, when the pandemic began to spread widely across the country and widespread lockdowns began, the budget gap for 2020 largely mirrored the shortfall during the same period of 2019. Federal spending from October through March was up 6.8%, while revenues rose 6.4%, Treasury officials said.

By contrast, from April through September, spending was nearly twice as high as it was during the same six-month period a year earlier, and receipts plunged 7.1%. That caused the deficit to climb 715% in the second half of the year, compared with the same period of 2019, Treasury officials said.

Much of the spending increase can be tied to efforts to mitigate the economic downturn that resulted from the pandemic, officials said. Spending by the Small Business Administration, which administered the Paycheck Protection Program for small businesses, totaled $577 billion, up from $456 million a year earlier. Spending by the Labor Department, which administers unemployment benefits, jumped to $477 billion in 2020 from $36.4 billion in fiscal 2019.

Spending for other safety-net programs, including Medicaid, Social Security and nutrition assistance, also climbed, along with outlays for new programs such as the coronavirus relief fund for cities and states and one-time $1,200 stimulus payments to households.

During the first half of fiscal 2020, federal receipts rose, as a strong economy and low unemployment boosted corporate and individual tax revenues. From April through September, however, receipts declined as the virus brought economic activity to a standstill, businesses shut down and more than 20 million workers lost their jobs.

Individual income and payroll taxes fell 7% in the second half of the year, while gross corporate tax receipts declined 15%, in part due to measures Congress enacted to help reduce taxes this year for businesses facing revenue losses, Treasury officials said.

Corrections & Amplifications
William Hoagland is senior vice president at the Bipartisan Policy Center. An earlier version of this article incorrectly said he was a senior fellow. (Corrected on Oct. 16)

Write to Kate Davidson at [email protected]

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