The federal government's debt binge is about to set a record

  • 22 April 2020
  • NormanL

The massive federal fiscal response to the eonomic shutdown may not be over yet, as Congress is currently dickering over yet another round of stimulus payments.

But one thing to keep an eye on is how all those payments are being financed -- with debt. And the debt we're piling up in the next couple of years could be historic, even by our profligate political class' standards:

Due to the effects of the crisis and legislation enacted to combat it, debt and deficits will now grow much higher, to never-before-seen levels both in dollars and as a share of Gross Domestic Product (GDP).

Our latest projections find that under current law, budget deficits will total more than $3.8 trillion (18.7 percent of GDP) this year and $2.1 trillion (9.7 percent of GDP) in 2021. We project debt held by the public will exceed the size of the economy by the end of Fiscal Year 2020 and eclipse the prior record set after World War II by 2023.

These projections almost certainly underestimate deficits, since they assume no further legislation is enacted to address the crisis and that policymakers stick to current law when it comes to other tax and spending policies. The projections also assume the economy experiences a strong recovery in 2021 and fully returns to its pre-crisis trajectory by 2025. Assuming a slower and weaker recovery (but no changes in law), we estimate debt would grow to 117 percent of GDP by 2025.

There are plenty of folks who say this most recent wave of red ink is both unavoidable and essential. Without it, the damage to the economy would be permanent. 

That doesn't remove the concerns about how all this debt will affect economic performamce in the years to come. It's not free money, after all. It goes on the books and must be repaid. The even more troubling question is whether the U.S. economy will become entirely dependent upon future massive infusions of federal aid. We'll be following the data on that story very closely.