WASHINGTON—The U.S. budget deficit has widened dramatically since April because of an unprecedented fiscal response to the pandemic, and that problem could get worse in the coming years unless both political parties take steps to correct the situation, budget hawks warn.
“The situation is poised to get considerably worse in the years ahead, but neither political party seems especially interested in doing much to correct the situation,” Carl Tannenbaum, chief economist at Northern Trust Asset Management, said in a report.
He says massive pandemic relief along with slow growth and demographics create headwinds for the U.S. budget.
The U.S. Congress passed four stimulus bills in response to the COVID-19 pandemic, approving nearly $3 trillion in spending and lending programs to address the economic fallout. Fueled by the deficits, the national debt in June surpassed $26 trillion for the first time.
Congress will likely enact another large coronavirus relief bill as House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin continue to push for a preelection stimulus deal. The next package, which is expected to have a price tag of $1.5 trillion to $2 trillion, would swell the deficit even further.
Demographics and slower-than-expected economic growth are other contributors to the deficit and debt problem.
“As the country ages, the costs of Social Security and Medicare will increase substantially,” Tannenbaum said. “The fiscal challenge posed by the retirement of the baby boom generation was apparent 30 years ago, but neither party has shown an appetite to tread on what some have called the third rail of American politics.”
Over the next 30 years, the national debt is forecasted to rise to nearly double the U.S. gross domestic product (GDP).
The Congressional Budget Office (CBO) released its updated long-term projections last week, which illustrate a significant deterioration in the fiscal outlook. CBO estimates that the deficit will reach $3.3 trillion this year, or 16 percent of the economy, marking the highest level since the end of World War II.
The federal debt held by the public is expected to rise to 98 percent of GDP in 2020 from over 79 percent last year. And the debt will exceed the size of the economy in 2021 for the first time since the mid-1940s.
Growing debt has adverse and potentially dangerous consequences, according to the Committee for a Responsible Budget (CRFB), a nonpartisan public policy organization. A rising debt level weakens the government’s ability to respond to the next downturn, imposes undue burdens on future generations, and heightens the risk of a future fiscal crisis.
“While addressing the COVID-19 pandemic and economic crisis remains the top priority, neither candidate has proposed a plan to address the long-term trajectory of the debt,” a CRFB report said.
The national debt nearly doubled under the Obama–Biden administration, from 39 percent of GDP to 76 percent in eight years, according to the report.
And the debt has continued to grow under the Trump administration, which is now expected to reach 98 percent of GDP because of tax cuts, bipartisan spending deals, and fiscal stimulus to fight the pandemic, the report said.
However, much of the increase in debt-to-GDP, which is roughly 17 percentage points resulting from the pandemic, would be recorded in 2020.
The economic agendas of both the Biden and Trump campaigns suggest that overall debt level will continue to rise in coming years.
The Biden campaign has proposed a tax plan that would create more than $3 trillion in revenues over the next 10 years, according to estimates.
However, Biden also announced his plans to spend $2 trillion on clean energy and infrastructure, $1.5 trillion on health care, and $850 billion on an education plan for preschool and K–12. In addition, Biden’s agenda includes “trillions more in spending for housing, higher education, retirement, and disability and other initiatives,” according to the report.
JPMorgan predicts that the Biden platform will produce cumulative deficits of around $2 trillion over the next decade.
“If enacted as planned, much of the spending would be front-loaded in the early part of that horizon,” Michael Feroli, chief U.S. economist at JPMorgan, said in a report. “Moreover, there’s reason to believe the increase in spending would be prioritized over the increase in taxes.”
While the Trump campaign hasn’t released a detailed policy agenda, his proposals appear to be deficit-increasing as well, according to the CRFB.
Most of his economic policy proposals, including “made in America” tax credits, additional tax cuts, increased spending on infrastructure, the Space Force, NASA, veterans, national defense, police, and school choice would add to the debt, the report stated.