Even before the coronavirus crisis hit the U.S., the federal government was on track for its worst budget deficit since 2012.
The federal deficit grew 8% in the first half of fiscal 2020, rising to $743.6 billion for the October-to-March period, the Treasury Department reported Friday. And that was during boom times.
Then the pandemic closed much of the U.S. economy. In the past month, Congress and the administration have approved borrowing that totals more than $2.3 trillion for three rescue packages to support workers and businesses shuttered by the pandemic.
The money is also going to states, localities and hospitals whose finances are suddenly a wreck.
Rounds four and five of emergency aid, totaling perhaps another $2 trillion, are being planned. A Treasury official acknowledged that the monthly deficits ahead in fiscal 2020 will be significantly worse, with the pandemic throwing nearly 17 million out of work so far and business revenues grinding to a halt, meaning tax collections will plummet.
Some are forecasting an annual deficit this year of more than $3.5 trillion, up from $984 billion in fiscal 2019.
Nobody is blaming the government and the Federal Reserve for devoting trillions of dollars to rescue the economy from an unprecedented calamity. Fiscal watchdogs are simply pointing out that the costly crisis is hitting at a time when Washington can least afford it, and the disaster will make the policy decisions ahead even more painful.
“Before this pandemic, we were at about 80% of debt-to-GDP,” said former U.S. Comptroller General David Walker. “And now after this pandemic, we’re probably going to be about 100% of debt-to-GDP.”
A ratio of 60% is often cited by economists as a healthy level for developed countries to maintain strong growth.
The federal government’s debt exceeded $24 trillion for the first time last week, according to the Treasury Department. The spike from $23 trillion to $24 trillion was the fastest in history, taking only 159 days a rate of more than $6 billion of red ink per day.
The second-fastest jump in trillion-dollar increments was at the end of the George W. Bush administration and the beginning of the Barack Obama administration, from September 2008 to March 2009. During that financial crisis, the debt rose from $10 trillion to $11 trillion in 167 days.
As the federal debt mounts, the government “will spend more of its budget on interest costs, increasingly crowding out public investments,” said the Peter G. Peterson Foundation.
The U.S. currently is spending more than $1 billion per day on interest payments. Over the next decade, the Congressional Budget Office estimates that interest costs will total $5.9 trillion under current law.
And interest rates currently are near zero. As they rise in the future, so will the cost to taxpayers.
The Government Accountability Office said last month that the federal government’s fiscal path is “unsustainable.”
“Long-term fiscal projections by GAO, [Congressional Budget Office], and in the 2019 financial report show that, absent policy changes, the federal government continues to face an unsustainable long-term fiscal path,” the GAO said in its annual report.
President Trump on Tuesday will unveil a bipartisan task force to make recommendations on how and when to get America back to work. To jump-start the economy again, Mr. Trump is also advocating moves including a payroll tax cut and restoring tax deductions for business meals and entertainment.
Some advisers also have been pushing for a cut in capital gains taxes.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said deficits shouldn’t be ignored in the solution.
“This is a national emergency, not the time to pursue ‘Tax Cuts 2.0,’” she said in a statement. “Setting aside short-term deficit concerns in order to avoid a depression doesn’t mean we should spend or reduce taxes for whatever one might want.”
She said there “may be a place for versions of some of these ideas later on once the pandemic is addressed and the focus can shift to economic recovery.”
“But taken together, it’s pretty clear this is just a back-door effort to pursue further tax cuts on top of the 2017 Tax Cuts and Jobs Act,” she said. “Our national debt was already on an unsustainable trajectory prior to the coronavirus, and the current crisis means that reckoning will come much sooner. If we do borrow more, it should be as part of a laser-focused effort to stabilize the economy and public health situation to combat this current crisis head on.”
Mr. Walker, in a conference call hosted by the No Labels political organization, noted that the U.S. is relying most heavily on China and Japan to finance its debt.
“Japan’s got much more serious demographic problems than we do,” Mr. Walker said. “And China obviously has some adverse interests in the United States. We need to recognize the reality that what we’re doing now and what we’ve been doing for the last 20 or so years is imprudent, unsustainable, irresponsible, and, I would argue, unethical and immoral.”
Before the crisis hit the U.S. economy, federal spending was rising faster than tax collections, Treasury said. Federal tax receipts in the first six months of the fiscal year grew 6% over the same period last year, to $1.604 trillion, while spending rose 7%, to $2.347 trillion.
The president is predicting the U.S. economy will take off “like a rocket ship” from pent-up demand after the pandemic is defeated. But Mr. Walker said the longer-term solutions to the federal government’s finances are far more difficult.
“You have to grow the economy faster than the debt,” he said. “But if you look at the workforce statistics … if you look at our birth rate, which is basically the replacement rate, you’re not going to be able to grow your way out of this problem. You’re going to have to make tough choices with regard to social insurance programs, with regard to defense and other spending.”
He said the nation’s finances “really came off the rails” in 2003, when the Bush administration combined a second round of tax cuts with the costly invasion of Iraq. At the same time, Congress and the administration added $9 trillion in unfunded obligations by expanding prescription drug benefits under Medicare.
“And since then, we’ve been out of control,” Mr. Walker said. “Republicans want tax cuts, Democrats want bigger government and spending increases.”
He pointed to the largest coronavirus rescue bill, which grew from roughly $1 trillion to $2.2 trillion after Senate Democrats defeated the administration’s initial proposal.
“The compromise bill spent over twice as much money, and has non-germane things in it, and now they want to spend another $1-2 trillion plus, and God knows what else is going to be in there,” Mr. Walker said. “I’m not saying we don’t need to do anything. But compromise nowadays is ‘you get what you want, I get what I want, and we’ll pass the bill on to our kids and our grandkids.’”