WASHINGTON—U.S. government debt will exceed the size of the
economy in the government’s 2021 fiscal year, a milestone not hit since World
War II that has been brought into reach by a giant fiscal response to the
coronavirus pandemic.
The Congressional Budget Office said Wednesday that federal
debt held by the public is projected to reach or exceed 100% of U.S. gross
domestic product, the broadest measure of U.S. economic output, in the fiscal
year that begins on Oct. 1. That would put the U.S. in the company of a handful
of nations with debt loads that exceed their economies, including Japan, Italy
and Greece.
This year the ratio is expected to be 98%, also the highest
since World War II.
The surge in borrowing so far isn’t creating angst among
investors or hampering the U.S.’s ability to borrow more. Investors have
gobbled up U.S. Treasury assets, drawn to their relative safety. Moreover,
interest rates are expected to remain low, suggesting the government still has
plenty of room to borrow.
The yield on the benchmark 10-year U.S. Treasury fell
Wednesday to 0.643%, from 0.672%, in line with a broader rally in financial
markets. Bond yields fall as prices rise.
The U.S. passed the 100% debt-to-GDP mark, measured on a
quarterly basis, in the April to June quarter, when government spending surged
to combat the new coronavirus and tax revenue plunged. But this would be the
first time in more than 70 years for it to do so for the federal government’s
full fiscal year.
The last time the U.S. debt level exceeded economic output
was in 1946, when it stood at 106% after years of financing military operations
to help end World War II.
Policy makers have compared the fight against the
coronavirus to a military war effort, and approved roughly $2.7 trillion in
spending since March for testing and vaccine research, aid for hospitals and
economic relief for businesses, households and state and local governments.
Federal revenue fell 10% from April through July, compared with a year earlier,
as fears of the virus and widespread business shutdowns brought economic
activity to a standstill, and firms laid off millions of workers.
The combination of those factors sent the federal deficit
soaring and caused government debt as a share of economic output to jump.
By the end of June, total debt had swelled to $20.5 trillion
from $17.7 trillion at the end of March, a 16% increase over just three months,
according to Treasury Department data. Meanwhile, the economy shrank 9.5% in
the second quarter, bringing debt as a share of GDP to 105.5%, compared with
82% in the first quarter.
“It was a massive rise in borrowing and quite shocking, but
incredibly effective,” said former CBO chief economist Wendy Edelberg, who in
June became director of the Hamilton Project, a think tank affiliated with the
Brookings Institution. “On the flip side, this is exactly why we, as a country,
want to have room to increase borrowing during times of emergency.”
Although the economy contracted sharply in the second
quarter, the decline would have been much worse if not for the historic fiscal
support, economists say. The spending propped up incomes through stimulus
checks for households, enhanced jobless benefits and emergency small-business
loans.
CBO projects those measures will add little to the deficit over
the next 10 years, because they are entirely offset by low inflation and very
low interest rates. Wednesday’s estimate said the deficit would grow by $13
trillion over the next decade, compared to March’s $13.1 trillion projection.
The mounting U.S. debt load is at the center of a debate in
Congress over how much additional relief the government can afford to provide
to households and businesses hit by the pandemic.
Cutting the size of the nation’s debt hasn’t in recent years
been a priority of lawmakers in either political party—a factor that
facilitated bipartisan support for earlier pandemic stimulus packages. The
latest effort is testing the limits on lawmakers’ willingness to spend,
however. Democrats have pushed for a broad-based, $3.5 trillion relief package,
while the White House and Senate GOP have sought to cap the bill at $1
trillion. Some Republicans have argued against any additional relief measures
at all.
Net interest costs on the debt have declined 12% during the
first 10 months of the fiscal year compared with the same period a year
earlier, despite rising red ink.
“There’s no economic difference between a ratio of 99% and a
ratio of 101%,” Ms. Edelberg said. A more useful measure of the country’s
fiscal health is its debt-to-GDP trajectory, she added.
After World War II, federal debt levels remained relatively
stable for years and a booming 1950s economy helped cut the debt-to-GDP ratio
in half, to 54%, by the end of the decade. That isn’t expected to happen this
time.
Deficits and debt were already projected to rise over the
coming decades as an aging population pushes up the costs of Social Security
and Medicare. In the years before the virus, Congress also approved a handful
of measures that widened the budget gap, including two bipartisan budget deals
that lifted government spending above previously enacted caps and a Republican
tax cut that has constrained revenues.
While debt has risen in most advanced economies, the U.S. is
the only country whose debt-to-GDP ratio is expected to continue rising after
2021, according to the International Monetary Fund’s Fiscal Monitor Report. It
is also expected to record the biggest jump in debt-to-GDP this year among
advanced economies, including Germany, France, Italy and the U.K.
“In the short term you have to spend what it takes to
minimize the recession and keep the economy afloat,” said Brian Riedl, a senior
fellow at the conservative Manhattan Institute for Policy Research. “But the
soaring debt to GDP ratio is totally unsustainable, even if interest rates
remain low.”
Interest costs are expected to eat up a larger share of the
federal budget, topping out at $1 trillion a year by the end of the next
decade, Mr. Riedl estimates.
The larger the debt grows, the more sensitive it becomes to
even small shifts in interest rates, and the more likely it is to crowd out
private investment, he added.
Economists have long used letters of the alphabet like V and
U to describe economic recoveries. But the coronavirus downturn is so different
from past recessions that economists are coming up with new shapes to describe
the potential recovery. WSJ explains. Illustration: Jacob Reynolds
House Speaker Nancy Pelosi said last week that Democrats
would be willing to accept a $2.2 trillion relief package, but the talks
remained at an impasse as Senate Republicans prepared to introduce legislation
after they return from their August recess next week.
Federal Reserve Chairman Jerome Powell and some economists
have said Congress needs to do more to support the nascent recovery, especially
with unemployment in double digits and the virus continuing to spread
throughout the country. The pandemic has forced many states to alter reopening
plans and could temper the economic rebound expected this summer.
“I think we’re going to continue to see the U.S. economy
recover,” Tyler Goodspeed, the acting chairman of President Trump’s Council of
Economic Advisers, said at a press briefing last month. “It would recover a lot
faster, and with much less long-term scarring, with additional support.”
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