Question

what effect did the covid-19 financial crisis of 2020 have on the federal budget deficit?

Answer 1

The COVID-19 pandemic has brought shortages of many things, from ventilators in hospitals to hand sanitizer on store shelves. Also in deficit is economic activity, as people are prevented from spending and working by stay-at-home orders. Tax revenue is in deficit, too, causing federal budget shortfalls of a scale not seen since World War II. Most states are in such dire financial straits that some politicians have even proposed letting them file for bankruptcy. At the federal level, the government budget deficit may be 17% of gross domestic product (GDP) in 2020, estimates the nonpartisan Congressional Budget Office (CBO), though it could well be higher. Deficits of consumption and production are guaranteed to produce deficits on the government’s balance sheet.

The CBO estimates that federal government debt will be 101% of GDP by the end of this year, and approaching 108% by the end of 2021. This is likely an underestimation because Congress will legislate additional relief programs as the crisis continues. The increase in government indebtedness under the Trump administration will be roughly equivalent as a share of GDP to the Obama administration’s crisis-fighting efforts after the 2008 crash. Under the Trump administration, the government was already running large deficits. Now, the deficit figures are shooting yet higher.

The U.S. Federal Reserve has said it could buy unlimited quantities of U.S. Treasuries (government bonds). Estimates suggest that the size of its balance sheet—i.e., the number of bonds it has bought—could double or almost triple over the course of the year. In addition, the Federal Reserve is also buying new types of assets in new ways. It has promised to buy $600 billion in loans to small- and medium-sized businesses and $500 billion in bonds issued by certain state and local governments—on top of existing programs such as buying bonds backed by mortgages.

The CBO projects the rate of unemployment will peak around 16% during the third quarter and fall to 11.4% by year end. The report also estimates that in calendar year 2021 GDP will be 2.8% and unemployment will fall to 10.1%. Rebounding from an economic contraction of this magnitude will take a considerable amount of time.