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October 20, 2020
2020-2514

Pandemic causes record federal deficit for FY 2020 of $3.1 trillion

According to the Treasury, the FY 2020 deficit was $3.1 trillion, up by over 200% compared to its level of about $1 trillion in FY 2019. The FY 2020 deficit was 15.2% of GDP, the largest by far since 1945.

  • Spending exceeded $6.5 trillion in FY 2020, up from $4.4 trillion in FY 2019.
  • Receipts were $3.4 trillion in FY 2020, similar to the $3.5 trillion in FY 2019.
  • The stock of outstanding federal debt also grew to record levels in FY 2020, just shy of 100% of GDP, which is the largest in US history except for the end of World War II.

Stimulus spending intended to cushion the effects of the COVID-19 pandemic accounts for the large increase in the FY 2020 deficit. For the first six months of FY 2020 (through March), the federal deficit was only about 8% higher than the comparable figure in 2019. The pattern of normal deficits for the first half of the year followed by COVID-related deficit increases can be seen in the figure below (from the Treasury's Final Monthly Treasury Statement), which shows the cumulative deficit by month in FY 2019 and FY 2020.

Monthly receipts, outlays, and budget deficit/surplus of the US government, cumulative, fiscal years 2019 and 2020

Federal spending increases were especially large in the categories of income security, health, and commerce and housing, as would be expected because of the pandemic. This can be seen in the table below (from Treasury's Final Monthly Treasury Statement), which compares the receipts and spending (outlays) in FY 2019 and FY 2020.

Summary of receipts by source, and outlays by function of the US government, fiscal years 2019 and 2020 (amounts in $ millions)

Classification

FY2020

FY2019

$ change

(year-over-year)

% change

(year-over-year)

Receipts

    

Individual Income Taxes

 1,608,662

 1,717,857

 (109,195)

-6%

Corporation Income Taxes

 211,845

 230,245

 (18,400)

-8%

Social Insurance and Retirement Receipts:

    

Employment and General Retirement

 1,261,650

 1,197,394

 64,256

5%

Unemployment Insurance

 43,104

 40,934

 2,170

5%

Other Retirement

 5,201

 4,787

 414

9%

Excise Taxes

 86,782

 98,915

 (12,133)

-12%

Estate and Gift Taxes

 17,624

 16,672

 952

6%

Custom Duties

 68,550

 70,784

 (2,234)

-3%

Miscellaneous Receipts

 116,538

 84,637

 31,901

38%

Total

 3,419,955

 3,462,223

 (42,268)

-1%

Net Outlays

    

National Defense

 726,151

 687,612

 38,539

6%

International Affairs

 67,660

 52,738

 14,922

28%

General Science, Space and Technology

 34,059

 32,464

 1,595

5%

Energy

 7,168

 5,109

 2,059

40%

Natural Resources and Environment

 40,691

 35,874

 4,817

13%

Agriculture

 49,153

 40,158

 8,995

22%

Commerce and Housing Credit

 571,657

 (26,139)

 597,796

2287%

Transportation

 146,156

 96,220

 49,936

52%

Community and Regional Development

 83,619

 29,148

 54,471

187%

Education, Training, Employment, and Social Services

 236,723

 134,908

 101,815

75%

Health

 748,293

 584,770

 163,523

28%

Medicare

 776,224

 650,997

 125,227

19%

Income Security

 1,262,558

 515,392

 747,166

145%

Social Security

 1,095,817

 1,044,416

 51,401

5%

Veterans Benefits and Services

 218,674

 200,078

 18,596

9%

Administration of Justice

 72,102

 65,990

 6,112

9%

General Government

 176,825

 19,466

 157,359

808%

Net Interest

 344,705

 375,605

 (30,900)

-8%

Undistributed Offsetting Receipts

 (106,362)

 (98,193)

 (8,169)

-8%

Total

 6,551,872

 4,446,611

 2,105,261

47%

Note: Details may not add to totals due to rounding. % change (year-over-year) is calculated as (FY2020/FY2019)-1, except for 'Commerce and Housing Credit' and 'Undistributed Offsetting Receipts' where there is an adjustment to account for the negative net outlays in one or both years.

Impact of increasing federal deficits and debt

Economists commonly identify a number of adverse consequences from large deficits and the consequently large long-term debt balances. These include:

  • Decreased national saving and future income. Because increased federal debt crowds out private investment, labor productivity and real wages would be lower than otherwise.
  • Pressure for larger tax increases or spending cuts in the future. Since increased federal debt would result in higher federal interest payments, additional federal revenue would be required to provide the same level of government services or federal spending would need to be reduced.
  • Reduced ability to respond to domestic and international problems. Unexpected events, such as recessions or foreign conflicts, are often accompanied by significant increases in federal government spending. A long-term increase in federal debt may reduce the ability of the federal government to respond to such situations.
  • Greater chance of a fiscal crisis. The Congressional Budget Office (CBO) projected (The 2020 Long-Term Budget Outlook) federal debt held by the public could be as much as 195% of GDP in 2050. The CBO projection assumes that investors will continue to lend to the federal government and would do so at relatively low interest rates. A loss in investor confidence could be accompanied by a loss of access to capital markets or significant interest rate increases. The debt-to-GDP ratio at which such a situation might occur, however, is subject to considerable uncertainty.

Conclusion

Companies need to be aware that the long-term pressures on the federal government's finances persist and are a major driver of future policy. Such policy changes could include structural changes to federal entitlement programs or changes in tax policy to raise additional revenue.

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Contact Information
For additional information concerning this Alert, please contact:
 
Quantitative Economics and Statistics Group
   • Brandon Pizzola (brandon.pizzola@ey.com)
   • Robert Carroll (robert.carroll@ey.com)
   • James Mackie (james.mackie@ey.com)