Long before COVID-19 struck the global economy, the U.S. debt‐to‐GDP ratio was large and growing. At the end of 2019, federal debt held by the public stood at 79.2 percent of GDP, up from 40 percent in 2008. The Congressional Budget Office (CBO) projected this ratio would reach 100 percent by 2032 and nearly 150 percent by 2049.1 Extending the CBO methodology suggested that, under existing policies, the debt would grow indefinitely relative to GDP.
Expert opinion varied widely about the policy implications of those projections. Some observers found them alarming, arguing that the U.S. faced near‐certain default and fiscal meltdown (albeit not for years or decades, given historical experience).2 Other observers were less concerned, pointing to low interest rates as evidence that the market is not overly alarmed.3 Still other economists voiced concern about the slow U.S. recovery after the Great Recession and argued that additional fiscal stimulus would help long‐term output, even if it meant higher deficits.4 Finally, some analysts and politicians simply prioritized greater spending or lower taxes, with little regard for the longer‐term fiscal outlook.
In this paper, I address how the COVID-19 pandemic, the ensuing recession, and subsequent policy responses have affected the U.S. fiscal imbalance (FI). The answer is not obvious, since recent events and policies could push FI in both directions. Lower interest rates and higher mortality rates among the elderly imply a smaller FI, other things being equal. Lower tax collections as a result of the recession, and higher expenditures on COVID-19 policies and the fiscal stimulus, imply a larger FI. I use recently updated projections from the CBO to discuss the net effect of these forces.
The perhaps surprising conclusion is that, while COVID-19 has had a significant short‐term effect on the debt‐to‐GDP ratio, it is unlikely to alter dramatically the trajectory of FI in the long run. Increased relief spending, lower GDP growth, and lower tax revenues will cause deficits to balloon over the next few years. Longer term, however, lower interest rates and slight declines in mandatory outlays will help offset some of these fiscal effects. And, presumably, most of these factors will be temporary, thus affecting the level of debt but not its long‐term growth rate. Overall, COVID-19 has not changed the fact that FI remains large and unsustainable because pre‐pandemic entitlement programs and other expensive policies—notably Medicare, Medicaid, Social Security, and the Affordable Care Act—had already put U.S. fiscal policy on that path.
In this paper, I will review the basic framework for projecting the deficit, debt, taxes, expenditures, and overall fiscal imbalance. Then I will review pre‐pandemic estimates of the U.S. fiscal path, discuss the robustness of these estimates to alternative assumptions, and outline how different policy adjustments might affect that imbalance. Using updated CBO projections, I will examine how the fiscal outlook has changed and suggest that the pandemic has not substantially altered the policy options for addressing the imbalance.