The world's largest economy just posted its largest fiscal deficit on record.
The U.S. budget shortfall more than tripled to $3.1 trillion in the government's fiscal year ended in September, swelling the national debt to exceed the economy's size, after lawmakers opened the spending spigots to soften the blow from the coronavirus pandemic, Treasury Department data showed Friday.
The deficit as a share of the economy surged to 16%, the largest since 1945, based on second-quarter gross domestic product. At the end of the financial crisis in 2009, the ratio was close to 10% before slowly narrowing through 2015.
Federal spending jumped 47.3% to $6.55 trillion in fiscal 2020, driven by increased outlays for unemployment compensation and small businesses after government-ordered shutdowns to mitigate spread of the coronavirus.
With the economy tumbling into recession in February, government revenue declined 1.2% from a year earlier. Receipts from individual and corporate income taxes fell this year compared to last.
The pandemic, and actions by President Donald Trump and Congress to limit the economic damage, quickly ushered in an era of even-larger deficits and borrowing while sending fiscal hawks into hibernation.
For its part, the Federal Reserve unleashed a massive monetary policy effort to get the economy back on its feet. The central bank cut the benchmark interest rate to near zero in March and expects to keep borrowing costs very low likely for years to come.
Fed Chairman Jerome Powell last week warned of a tepid recovery without additional government aid and said providing too much stimulus wouldn't be a problem.
The worry-about-deficits-later sentiment has been made easier because it's cheaper for the government to borrow. In fact, federal interest payments this year have declined due to falling yields.
Still, debt-to-GDP is now above 100% and borrowing will likely continue climbing over the next three decades.
The Congressional Budget Office's latest long-term budget outlook projects federal debt held by the public to be a whopping 195% of gross domestic product in 2050, as an aging population places more demands on Social Security and Medicaid.
Democrats and Republicans need to "come together and start planning how they will make the tough decisions needed to save Social Security and Medicare and stop our massive debt from spiraling out of control once the crisis is over and the economy has recovered," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement on Oct. 8.
Powell and other Fed officials say now isn't the time to worry about the deficit because unemployment remains high and the pandemic has crushed many businesses. But over the long term, it's a potential concern because it could crowd out private investment and in extreme cases spark inflation that risks diminishing the value of the U.S. dollar, the world's reserve currency.
Underscoring the massive fiscal relief efforts this year, the Treasury's report showed $275 billion in outlays for federal additional unemployment compensation that included the now-expired $600 supplemental weekly jobless payments. Spending for state unemployment benefits totaled nearly $196 billion in the fiscal year.
Spending by the Small Business Administration, which oversees the Paycheck Protection Program, totaled $577.4 billion this fiscal year, compared with $456 million in 2019.
Spending on the national defense went from the second-largest outlay in fiscal 2019 to fifth in 2020 as pandemic-induced spending resulted in larger spending for income security, health and Medicare.
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