March 18, 2021
Federal government's long-term fiscal outlook significantly worsened by latest COVID-related relief
The Congressional Budget Office indicates in its recently released The 2021 Long-Term Budget Outlook(3/4/2021) that the COVID-19 pandemic and related policy have significantly worsened the federal government's long-term fiscal imbalance. EY has quantified the further impact on the federal government's long-term fiscal imbalance of the $1.9 trillion of COVID relief enacted by Congress last week (American Rescue Plan Act of 2021).
Note: Deficit estimates include impact of COVID relief enacted through March 2021.
Sources: Congressional Budget Office, 10-Year Budget Projections, February 2021; CBO, Estimated Budgetary Effects of American Rescue Plan Act of 2021, March 2021; EY analysis.
Note: Impact of COVID-19 and related stimulus is estimated by the difference in CBO's reported figures from January 2020 and February 2021 accompanied by CBO's Estimated Budgetary Effects of American Rescue Plan Act of 2021 from March 2021.
Sources: Congressional Budget Office, Historical Budget Data, February 2021; CBO, 10-Year Budget Projections, February 2021; CBO, Long-Term Budget Projections, March 2021; CBO, Estimated Budgetary Effects of American Rescue Plan Act of 2021, March 2021; EY analysis.
The economic disruption caused by the pandemic and the $5.8 trillion of COVID-related relief enacted by Congress are the primary drivers of the historic budget deficits in 2020 ($3.1 trillion or 14.9% of GDP) and 2021 ($3.4 trillion or 14.9% of GDP). The increases in the deficit that begin in the second half of the 10-year budget window and then extend into the future are primarily due to the growth in the major federal entitlement programs — Medicare and Social Security — and the consequent increase in interest expenses on federal government debt.
Impact of increasing federal debt
The CBO reports that the large long-term increase in federal debt could have significant negative consequences for the US economy:
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. In addition to driving possible changes to federal entitlement programs, the long-term fiscal imbalance may be a driver for major changes in tax policy spending to raise additional revenue.