CBO Sees Busted Budget For 2021, But A Brighter Future

NEW YORK, NEW YORK - FEBRUARY 10: A woman receives the Moderna Covid-19 vaccination at a vaccination site at Stevenson Family Health Center in the Bronx on February 10, 2021 in New York City. The health center, which is part of the Institute for Family Health, administers dozens of vaccine shots and Covid tests daily in a neighborhood with a large Hispanic and African American population. New York City is now giving vaccinations to the elderly, first responders, workers in the restaurant industry and others. While thousands continue to die daily from COVID-19, cases are declining throughout the United States. (Photo by Spencer Platt/Getty Images)

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While it’s no surprise that the U.S. government is expecting a ballooning deficit this year because of the last stimulus package, the Congressional Budget Office’s (CBO) long-term outlook for the federal budget has improved along with hopes that vaccines will kick the economy back into gear.

The government will spend $2.3 trillion more than it will take in this year—a 25% bigger deficit than it expected in September, though still $900 billion less than the shortfall in 2020, the CBO said in its latest budget and economic outlook report Thursday.  But looking farther into the future, between 2021 and 2030, the cumulative deficit is now expected to be $12.6 trillion, or 3% smaller than previously forecast.  

“CBO now projects stronger economic activity, higher inflation, and higher interest rates, boosting both revenues and outlays—the former more than the latter,” the report said. 

The CBO, a nonpartisan research agency that provides Congress with budgetary analyses, predicts the rollout of new COVID-19 vaccines will reduce the spread of the disease, allowing for more normal activities to resume and for gross domestic product (GDP) to return to its pre-pandemic level by the middle of the year. The number of jobs in the U.S. economy should return to pre-pandemic levels by 2024, the CBO said, helping to boost the tax revenue going into government coffers.

Daunting Deficits

Still, the size of the national debt is daunting: compared to the size of the economy, the deficit for 2021, at 10.3% of GDP, will be the second-largest since World War II, with only 2020 being bigger. By 2031, it will reach 107% the size of the GDP, an all-time record, the CBO estimates. The sudden rise in the public debt over the past several years has economists wondering how much debt is too much, and at what point it hurts the economy. 

President Joe Biden has proposed a $1.9 trillion relief bill that’s not part of the CBO’s calculations.  The Committee for a Responsible Federal Budget, an anti-deficit group, said the CBO’s latest report shows the need for a more “targeted” relief package than the one Biden has proposed.

“We understand and share the desire to make vital public investments and address income inequality,” Maya MacGuineas, president of the CRFB, said in a statement. “But we shouldn’t ask our kids to bear the cost of all this when we are already leaving them a record mountain of debt. We should pass a reasonable COVID relief package, pay for new spending initiatives, and then work together to bring the long-term debt under control.” 

The national debt hasn’t been much of a drag on the U.S. economy so far thanks to the low interest that the government pays on it, said Wells Fargo economists in a research note published shortly before the CBO’s report. 

But the problems could pile up swiftly, if and when the current era of low interest rates come to an end, they said. The added costs of servicing debt could put the squeeze on the government’s ability to respond to national emergencies and fund public services. The threat appears to be more of a long-term issue than a pressing emergency.

"Rather than viewing the long-term fiscal outlook in the United States as a 'wolf at the door' problem, we think of it as more of a 'termites in the foundation' challenge that could put downward pressure on the potential growth of the U.S. economy if left unchecked over the long run," Wells Fargo said. "If public investment is curtailed or fiscal policy is kept tight during recessions due to high public debt levels, then there could be negative long-term repercussions on the U.S. economy."