Coronavirus Masks Underlying Government Spending Problem
According to CBO projections, the federal budget deficit will come in at $3.3 trillion for fiscal 2020. That’s more than triple the budget shortfall last year and more than double the previous deficit record set at the onset of the Great Recession.
The media has pretty much ignored the ballooning deficits since the beginning of the pandemic, but the fact that the federal debt held by the public is projected to reach or exceed 100 percent of U.S. GDP for the first time since World War II in fiscal 2021 generated some headlines. Even so, most of the reporting ignores Uncle Sam’s chronic spending problem and pins the blame for the surging deficits on government response to the coronavirus pandemic.
The fact is the federal government was on an unsustainable borrowing and spending trajectory before COVID-19 reared its ugly head. The CBO projects federal outlays will equal 32 percent of GDP in 2020, 11 percentage points (or about 50 percent) above what they were in 2019. That ranks as the highest percentage since 1945.
Lost in all the comparisons is the fact that at $984 billion, 2019 ranked as the fifth-largest deficit in history.
One would expect to see a budget deficit that big during a major economic downturn. Up until this year, the federal government had only run deficits over $1 trillion in four fiscal years, all during the Great Recession. We were already approaching that number before the pandemic, despite having what Trump keeps calling “the greatest economy in the history of America.”
Before COVID-19, the Trump administration was already on pace to chart a $1 trillion deficit for fiscal 2020. Through the first three months of the current fiscal year, the deficit ballooned to $356.6 billion. That was an 11.8 percent increase from a year ago. In just three months, Uncle Sam blew through $1.16 trillion. Spending through the first three months of FY2020 was up 6.5 percent over the spending through the first three months of fiscal 2019.
In other words, despite an economy supposedly in the midst of a boom, U.S. government borrowing and spending looked more like we were in the midst of a deep recession — before the government-induced coronavirus recession. Long-term U.S. debt sales rose to levels not seen since the height of the financial crisis — before the current financial crisis. And the Federal Reserve was already monetizing US debt with quantitative easing before the pandemic.
Stimulus programs to deal with the economic fallout from government shutdowns have put the borrowing and spending on hyperdrive. Consider that the June budget deficit came in at $864.1 billion dollars. That ranks it sixth on the list of the all-time biggest annual deficits.
The CBO projection that debt held by the American public would exceed 100 percent of GDP next year grabbed headlines. It means the debt is approaching record territory. This hasn’t happened since the Second World War. But the headline understates the problem. According to the national debt clock, the actual debt-to-GDP ratio already exceeds 136.6 percent. If you include state and local debt, the percentage surges to 154 percent.
A lot of people claim massive deficits and ballooning debt don’t matter. But borrowed money has to be paid back – either through taxation or inflation – which is nothing more than a hidden tax.
Debt also retards economic growth. Studies have shown that a debt to GDP ratio over 90 percent retards economic growth by about 30 percent.
You can try to paper over the surging deficits and ballooning debt by claiming it is “necessary” to fight the coronavirus. The excuse certainly creates good political cover for a free-spending Trump administration that looked a lot like the Obama administration even before the pandemic when it comes to red-ink. But you can’t paper over the economic consequences of over-spending and debt. There is no such thing as a free lunch – even if you own a money printing press.