It may be surprising to hear that most economists consider money to be well spent – or at least necessary. Few think it’s wise to quibble over how much borrowing is deemed necessary to support American households and businesses during the most serious public health crisis in more than 100 years. This is especially true, economists say, when the government’s borrowing costs are extremely low and investors always seem keen to buy its debt as fast as the Treasury issues it.
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U.S. budget deficit set to hit record $ 3.3 trillion due to coronavirus measures
Here’s a look at federal debt and how the government is using it to fight the pandemic and the economic suffering it inflicts.
How much money are we talking about?
The annual deficit – the gap between what the government spends and what it collects in taxes – will reach $ 3.3 trillion in the budget year that ends Sept. 30, according to the CBO. This represents 16% of the US gross domestic product, which is the broadest measure of economic output. Not in 75 years has a deficit been so large.
Federal debt, reflecting the accumulated deficits and the occasional surplus, is expected to reach 100% of GDP next year. Then, it is expected to continue to climb to $ 24.5 trillion – 107% of GDP – in 2023. This would break the record 106% of GDP set in 1946. (The percentage does not include debts that agencies governments owe each other, including the social security trust fund.)
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Why is the budget so out of balance?
The US government was already deeply in debt even before the virus hit in March. The budget had absorbed spending from the Great Recession of 2007-2009, federal benefits for the retirements of the vast baby boom generation, and the cost of President Donald Trump’s tax cut in 2017. last year, the debt burden reached 79% of GDP, the highest share since 1948.
Then came the pandemic. The economy tumbled into a sickening free fall as businesses closed and millions of Americans hid in their homes to avoid infection. GDP collapsed at an annual rate of 31.7 percent from April to June, the three worst months on records dating back to 1947. In March and April combined, employers shed a record 22 million jobs .
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To help Americans weather the crisis, Congress passed a $ 2 trillion relief bill in March. Among other things, the package sent Americans one-off checks of up to $ 1,200 and temporarily offered the unemployed $ 600 a week on top of their unemployment benefits.
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Can the United States refund all that money?
After World War II, the United States paid off the federal debt with surprising speed. By 1961, the debt had fallen to 44% of GDP, the same level as before the 1940 war.
Behind this success lies a fast growing economy that has generated increasing revenues for the government and written off debt. From 1947 to 1961, the economy grew at an annual rate of 3.3 percent. The financial system was tightly regulated by the government. This has enabled policymakers to keep interest rates artificially low and minimize the cost of debt repayment.
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The circumstances are somewhat different now. The economy is not growing as fast as it did in the post-war boom years. Since 2010, GDP growth has only averaged 2.3%, even excluding this year’s economic implosion. And the government no longer controls interest rates like before, not after the financial deregulation of the 1980s.
Yet the Federal Reserve is helping to keep government borrowing rates extremely low by buying huge volumes of Treasury debt.
Does debt have economic consequences?
Economists have long warned that too much government borrowing risks hampering the economy. When the government is excessively indebted, the argument goes, it competes with businesses and consumers for loans, forcing borrowing rates to be prohibitive and jeopardizing growth.
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Another concern is that investors will demand ever higher interest rates to accept the risk that governments could default on their debts.
Some economists and budget watchers are still warning that a judgment day will come and the United States will have to cut spending, raise taxes, or both.
But after the Great Recession, many economists began to rethink their views on debt. The recovery in the United States and especially in Europe has been slow in part because policymakers were too reluctant to stimulate growth through debt.
In the United States, rates did not rise even though public debts were high. It turned out that investors had an almost insatiable appetite for US Treasuries, still considered the safest investment in the world. Their eagerness to buy federal debt has helped keep rates low and keep government borrowing costs low. The same was true of persistently low inflation.
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In an environment of such low interest rates and low inflation, the risk of taking on more debt seems more manageable, at least for countries like the United States and Japan that borrow in their own currencies.
In a speech last year, Olivier Blanchard, former chief economist of the International Monetary Fund, said:
“To put it bluntly, government debt may have no fiscal cost… The likelihood that the US government can refinance debt, can issue debt and achieve a declining debt-to-GDP ratio without never having to raise taxes later is high. ”
Martin Crutsinger, editor of AP Economics, contributed to this report.
© 2020 The Canadian Press