Finance

Deficit to soar to nearly $4T as economy buckles, CBO says

The agency’s sobering appraisal of the near-term job market comes after unemployment claims skyrocketed to 26 million over the last five weeks.

Phillip Swagel

The current economic downturn will drag on for months, with double-digit unemployment rates rocking the labor market and a deficit ballooning to $3.7 trillion this year, the Congressional Budget Office said in a grim projection Friday.

The independent budget agency estimated that the unemployment rate will rise to 16 percent later this year, dropping to 9.5 percent by the end of 2021. By that time, the labor force will have “about 6 million fewer people,” CBO noted.

Improvements in the economy are forecast beginning in the third quarter of this year, but a "sharp contraction" will persist through the end of June, the agency said. "In the third quarter, economic activity is expected to increase, as concerns about the pandemic diminish and state and local governments ease stay-at-home orders, bans on public gatherings, and other measures restraining economic activity," CBO said.

"However, challenges in the economy and the labor market are expected to persist for some time. Interest rates on federal borrowing are expected to remain quite low in relation to rates in recent decades."

The agency’s sobering appraisal of the near-term job market comes after unemployment claims skyrocketed to 26 million over the last five weeks, with 4.4 million claims added in the last week. The pandemic has both physically sidelined Congress and dominated the legislative agenda, with lawmakers enacting four separate bills in the last month totaling more than $2.7 trillion.

That legislation is expected to contribute to a federal deficit that will hit $3.7 trillion this year, CBO said. Federal debt held by the public will be 101 percent of GDP by the end of the fiscal year.

The budget office’s projections don’t account for future legislation, which could again top $1 trillion. Governors have pleaded for at least $500 billion to plug drastic revenue shortfalls, while House Democrats and the Trump administration are also eyeing infrastructure investments and additional tax cuts.

Senate Majority Leader Mitch McConnell, meanwhile, has said Congress should hit pause on delivering more relief and take stock of the “extraordinary numbers that we’re racking up to the national debt.”

Responding to CBO’s grim projections, Republican Sen. Ben Sasse of Nebraska warned about the effects of the nation’s fiscal burden on future generations.

“Republicans and Democrats maxed out the credit cards during good times and now, when we’re in the middle of the coronavirus’ health and economic crises, we’re facing a bleak future,“ he said in a statement. “None of this is sustainable. If politicians continue to ignore the problem, this debt will crush our kids.”

CBO noted that interest rates on federal borrowing are expected to “remain quite low,” however, making the debt burden more palatable.

The left-leaning Center on Budget and Policy Priorities said the bleak new numbers shouldn’t preclude Congress from fully responding to the crisis, warning that “inadequate action“ because of worries about the deficit and debt will only make things worse.

“This means that debt and deficits will need to rise in the period ahead as lawmakers take needed additional steps to improve the health and well-being of people and the economy and prevent a deeper and more protracted downturn from taking hold,“ the think tank said. “The nation has long-run fiscal challenges, but it does not face a debt crisis now, while it does face immediate health, humanitarian, and economic crises that need to be addressed.“

CBO expects real GDP to plummet by 11.8 percent in the second quarter. Overall, the economy is expected to shrink by 5.6 percent in 2020, before growing by 2.8 percent next year.

The budget office cautioned that the numbers “are subject to enormous uncertainty“ during the pandemic. Social distancing measures are expected to last through at least June, CBO said, falling off in the second half of this year.

“The agency’s projections also include the possibility of a reemergence of the pandemic,” CBO said. “To account for that possibility, social distancing is projected to continue, although to a lesser degree, through the first half of next year.“

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