The effects of the COVID pandemic on the federal budget outlook
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ORIGINAL ARTICLE
The effects of the COVID pandemic on the federal budget outlook Alan J. Auerbach1 · William Gale2
© National Association for Business Economics 2020
Abstract We examine the impact of COVID-19 on the federal budget outlook. We find substantial but temporary effects on spending and revenues, with more moderate but permanent effects on the long-term projections. We project that the debt-to-GDP ratio, currently 98%, will rise to 190% in 2050 under current law, compared to a CBO pre-COVID projection of 180%. Sharply lower interest rates projected for the next dozen years help moderate future debt accumulation. Under a “current policy” projection that allows temporary tax provisions—such as those in the Tax Cut and Jobs Act of 2017—to be made permanent, the debt-to-GDP ratio would rise to 222% by 2050 and would continuing rising thereafter. The long-term projections are sensitive to interest rates. We discuss several aspects of these results, including how the current episode compares to past debt changes, the role of historically low interest rates, and the role of recent Federal Reserve Board policies and actions. Because of the macro-stabilization effects of fiscal tightening, and because low interest rates create “breathing room” for fiscal policy, we do not see the large, short-run debt accumulation resulting from the current pandemic as necessitating any immediate offsetting response. But the long-term projections show that significant fiscal imbalances remain and will eventually require attention. Keywords COVID · Budget outlook · Fiscal policy
1 Introduction COVID-19 has created significant changes in almost all aspects of the economy. In this paper, we examine the impact on the federal budget outlook, with five main results. First, we document that the pandemic and the policy responses to it rapidly and substantially raised federal deficits.1 This increase is temporary, however. Spending and revenues are projected to return to pre-COVID baseline values relatively quickly. Second, the long-term fiscal outlook through 2050 has deteriorated somewhat. Under the Congressional Budget Office’s (CBO 2020f) assumptions for GDP growth and interest rates, we project that the debt-to-GDP ratio, currently 98%, will rise to 190% in 2050 under current law, compared to a pre-COVID baseline projection of 180%. * William Gale [email protected] Alan J. Auerbach [email protected] 1
University of California, Berkeley, USA
Urban-Brookings Tax Policy Center, Washington, DC, USA
2
CBO (2020f) obtains a similar projection—195%—using a slightly different set of assumptions about taxes and spending programs. Third, although the economic downturn and COVIDrelated legislation raise debt permanently, sharply lower projections of interest rates for the next dozen years help moderate future debt accumulation. Nevertheless, even during the period when interest rates are projected to be low, the projected debt-to-GDP ratio rises due to substantial and rising primary deficits, driven largely by rising ou
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