October 20, 2020
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)
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Individual Income Taxes
Corporation Income Taxes
Social Insurance and Retirement Receipts:
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Employment and General Retirement
Estate and Gift Taxes
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General Science, Space and Technology
Natural Resources and Environment
Commerce and Housing Credit
Community and Regional Development
Education, Training, Employment, and Social Services
Veterans Benefits and Services
Administration of Justice
Undistributed Offsetting Receipts
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.
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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