Monday, August 17, 2020

The Impact of the COVID-19 Pandemic on Washington's Fiscal Health

With Washington spending trillions of dollars since the economic shutdown began in March 2020, its long-term fiscal situation looks far worse than it did during the 2008 - 2009 Great Recession.  An analysis by the Manhattan Institute shows just how dire the situation will become over the next 20 years.  Here are some of the highlights of their analysis.

The pandemic has led to a two-fold problem; declining tax revenues and increased spending, the "perfect fiscal storm".  According to the Manhattan Institute, this will lead to a budget deficit of $4.275 trillion in fiscal 2020, well above the deficits experienced during the Great Recession as shown here:

As we entered fiscal 2020, the baseline deficit was $1.0 trillion according to the Congressional Budget Office's analysis in January 2020 as shown here:

At that time, the CBO projected a fiscal 2020 budget deficit of 4.6 percent of GDP as shown on this graphic:

Since that time, the CBO has projected that the first four coronavirus response bills will add $2.2 trillion to the federal deficit with the remaining portion of the deficit being made up of the economic and technical impacts of the economic shutdown (i.e. fewer Americans working and paying taxes and more people receiving unemployment and Medicaid benefits) which total roughly $1.0 trillion dollars.  In total, the Manhattan Institute expects that the deficit will reach $4.2 trillion for fiscal 2020, higher than the CBO's revised deficit of $3.7 trillion.

Let's put this into perspective.  Here is a graphic showing the combined budget deficits for the fiscal years between 2014 and 2019 in comparison to the estimated fiscal 2020 budget deficit:

The $4.2 trillion deficit will represent 19 percent of GDP, the largest in history excluding the peak reached during the Second World War as you can see on this graph which shows the deficit to fiscal 2019:

Here is a graphic showing how the coronavirus rescue legislation will push federal spending to uncharted levels on a per household basis:

According to the Manhattan Insitute's projections, the projected federal deficit will still be roughly $2.2 trillion next year and will never again fall below $1.3 trillion.  When the increased costs associated with Social Security and Medicare are included, the deficit will rise to $2.6 trillion by 2030 and continue to grow thereafter, pushing the federal debt as a percentage of GDP to extreme levels as shown on this graphic:

...and, over the next ten years, the coronavirus is expected to add $8.0 trillion to the federal debt, pushing the federal debt to $41.0 trillion by 2030 as shown on this graphic:

The long-term impact of federal spending related to the coronavirus pandemic will, over the long-term, be a game-changing event for Washington.  At some point, American taxpayers will experience cuts to services and entitlement programs, higher taxes or some combination of the two as investors grow increasingly cautious about investing in debt instruments of the world's most indebted nation.  There is one thing that is certain; the post-pandemic reality is going to be far different and less comfortable than what we expected.

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