US Debt to Reach 98% of GDP This Year
Well, here’s some exciting news to get you through that mid-week slump. The coronavirus response has pushed debt in the United States to levels not reached since the Second World War. The Congressional Budget Office reported today that debt will reach 98% of GDP this year, and exceed 100% of economic output in 2021.
United States economic output currently sits around $20 trillion. Federal debt was at $17 trillion at the end of 2019, but a combination of spending on coronavirus relief and lower tax revenue caused it to skyrocket in the second quarter.
The last time this happened was in 1946, when debt grew to 106% of GDP on the tail of Word War II. But after that period, economic growth shrank the debt to GDP ratio to 54% by the end of the decade. If our economic recovery is any indication, that’s not likely to happen this time.
The good news is that despite fears that this much debt would push inflation up and force interest rates higher, neither of those things has happened yet. Investors are still buying U.S. Treasury assets.
The CARES Act was a lifeline during shutdowns, but the bailouts, medical research, business loans, and enhanced unemployment (among other things) came with a price tag. Indeed, the federal government has spent $2.7 trillion since March. During this time, tax revenue fell 10% as shutdowns idled the economy.
GDP fell by 5% in the first quarter and 31.7% in the second.
The United States is expected to have the biggest jump in the debt to GDP ratio of all countries this year, according to the International Monetary Fund’s Fiscal Monitor Report. It is also the only country that the IMF expects debt to continue to rise in 2021.
