In 2021, America’s federal debt will reach about 102 percent of its gross domestic product, a slight increase from the year before. Even without additional spending or tax cuts, that number is expected to grow to 107 percent of GDP by 2031 — which would be an all-time high in American history, the CBO said.
The CBO’s debt projections are sure to reinvigorate the ongoing debate over Biden’s stimulus proposal, as Republicans try to argue that the U.S. faces unsustainable debt burdens after spending more than $4 trillion in response to the virus.
The projections also come one day after Federal Reserve Chair Jerome H. Powell warned of continued high unemployment and downplayed the imminent danger of inflation, projections Democrats cheered as boosting their case for more emergency relief. House Speaker Nancy Pelosi (D-Calif.) quoted from Powell’s remarks extensively at her press briefing on Thursday.
America’s economic recovery from the coronavirus has sputtered as the pandemic raged across this country this winter. Alarmingly, job growth in the U.S. has all but stalled out even as about half of the 22 million jobs lost during the crisis have returned.
“The deficit has been expanding since the pandemic for entirely good reasons,” said Ernie Tedeschi, who served as an economist at the Treasury Department under President Obama. “Any goal of fiscal sustainability in the long-term has to start with recovery from the economic catastrophe right now and over the next couple of years.”
The CBO projects that higher levels of vaccinations will dramatically reduce the number of coronavirus cases. As a result, the budget office projects that economic growth will quickly return to its pre-pandemic level by as soon as the middle of 2021. The CBO projects that GDP will increase by close to 5 percent in 2021, after contracting by 3.5 percent in 2020, before leveling off at an annual rate of growth of above 2 percent.
The CBO also estimated the federal unemployment rate would return to its pre-pandemic level by 2024. Separately, the CBO also projects a steady rise in income and corporate tax receipts throughout the decade.
But CBO’s economic and deficit projections face the extreme uncertainty of the unprecedented situation facing the American economy. The rollout of the vaccine has proven uneven at times, and fears have mounted about new variants of the virus and their effect on the nation’s pandemic response and economic recovery more generally.
“There are so many uncertainties: about the vaccine; about when people come back to work; about what this looks like on the other side — and the standard way of CBO presenting their thinking does not have a framework for quantifying those risks,” said Claudia Sahm, an economist who worked at the Federal Reserve. “And that’s a big problem right now because people are basing their policy advice on these numbers.”
CBO’s projections suggest that debt levels will remain historically high even with a largely successful economic rebound. The federal deficit will average about $1.2 trillion annually from 2022 to 2031, according to CBO’s projections.
The annual deficit is expected to decline by nearly $900 billion compared to 2020. The U.S. budget gap breached $3.1 trillion in 2020 due primarily to the trillions in new spending approved by Congress in response to the pandemic. Another $1.9 trillion in deficit spending, as Democrats are pushing, would likely push America’s fiscal imbalance above its 2020 levels.
Yet, the new CBO estimates do not incorporate Biden’s proposal to spend another $1.9 trillion to help get the recovery back on track and are sure to embolden Republicans who have been warning against more spending.
“Congress has already allocated more than $4.5 trillion to address this crisis,” Sen. Rick Scott (R-Fla.) said in a recent attack on Democrats’ proposal to spend $350 billion in aid for state and local governments. “Democrats need to return to reality [and] remember their obligation to the American taxpayer.”
Pelosi reiterated Thursday that her goal is for the House to pass Biden’s proposal by the end of February, and for Biden to sign it into law ahead of a mid-March deadline, when enhanced unemployment benefits expire. The timeline is uncertain with tougher fights expected in the Senate, because of the complex rules Democrats are using to push through the legislation without GOP votes.
Some economists say more deficit spending could be the help the economy needs. Joseph E. Stiglitz, a Nobel Prize winning economist at Columbia University, said a significant gap remains between the nation’s actual economic output and its potential economic output. Lawmakers should be focused on closing that gap to reduce unemployment and expand the economy, he said.
“Deficit spending expands output and employment, which can generate more tax revenue,” Stiglitz said. “If as the result of a little more deficit spending we get more growth and higher employment, that should not be too big a worry.”
Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, which pushes for deficit reduction, said lawmakers face a long-term challenge in getting spending and deficit levels to balance. That is not something that hinges on the precise size of Biden’s stimulus package, Goldwein said.
“Even without the $1.9 trillion, we will be at record-high debt levels,” Goldwein said. “Realistically, it’s going to come much sooner than that.”
— Erica Werner contributed to this report.