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U.S. Budget Gap Tripled to Record $3.1 Trillion in Fiscal 2020 — 2nd Update

By Kate Davidson 

WASHINGTON -- The U.S. deficit tripled to a record $3.1 trillion in the fiscal year that ended Sept. 30, as the government battled a global pandemic that plunged the U.S. into a recession in February, the Treasury Department said Friday.

A surge of federal spending to combat the coronavirus and cushion the U.S. economy, coupled with a drop-off in federal revenue amid widespread shutdowns and layoffs, contributed to the widening deficit. As a share of economic output, the budget gap in fiscal year 2020 hit roughly 16.1%, the largest since 1945, when the country was financing massive military operations to help end World War II.

The widening deficit has stirred concern among Republicans in the Senate, who have balked at a White House proposal to spend $1.88 trillion more to spur a recovery from the steepest economic downturn since the Great Depression. Many economists and Federal Reserve officials say restoring growth should be the first priority, and that worries about closing the deficit can come later.

"Unprecedented times call for unprecedented deficits," said William Hoagland, senior vice president at the Bipartisan Policy Center, a centrist Washington think tank. "Today's deficit figure is the result of six months of fighting the pandemic and its economic fallout."

Investors have shown scant concern about the deficit. U.S. government bonds were little changed Friday, with the yield on the benchmark 10-year Treasury note ticking up to 0.743% from 0.730% Thursday, according to Tradeweb. Yields rose in the morning after better-than-expected retail sales data but fell after a disappointing report on industrial production.

Federal receipts totaled $3.4 trillion, a 1% decline from the previous year, with much of the drop occurring since March, when the virus began spreading across the country. Federal spending rose 47% to a record $6.5 trillion as the government distributed emergency loans for small businesses, and enhanced jobless benefits and stimulus payments for American households.

Federal debt rose 25% for the year, to $21 trillion at the end of September, from $16.8 trillion at the start of fiscal 2020. The Committee for a Responsible Federal Budget has estimated debt hit 102% as a share of gross domestic product, exceeding the size of the economy for the full fiscal year for the first time in more than 70 years.

By another measure, the debt already exceeded the size of the economy during the April-through-June quarter, when it hit 105.2%, data from the Federal Reserve Bank of St. Louis show.

Historically low interest rates and low inflation, however, meant the cost of servicing higher government debt declined. Net interest costs on the public declined 9% last year from a year earlier, the Treasury said, suggesting the government has the capacity to borrow more to finance the recovery.

Research and economic data show that unprecedented relief spending -- the bulk of which was enacted in the $2.2 trillion Cares Act in March -- helped keep households and businesses afloat during the initial months of the downturn, boosting incomes and bolstering consumer demand.

With more than 10 million people still out of work, however, there are signs that the recovery's momentum is slowing as federal aid programs expire. Economists and policy makers, including Federal Reserve Chairman Jerome Powell, have warned that growth could decelerate further unless Congress passes additional aid.

Up until March, the budget gap for 2020 largely mirrored the shortfall during the same period of 2019. Federal spending from October through March was up 6.8%, while revenues rose 6.4%, Treasury officials said.

By contrast, from April through September, spending was nearly twice as high as it was during the same six-month period a year earlier, and receipts plunged 7.1%. That caused the deficit to climb 715% in the second half of the year compared with the same period of 2019, Treasury officials said.

Much of the spending increase can be tied to efforts to mitigate the economic downturn that resulted from the pandemic, officials said. Spending by the Small Business Administration, which administered the Payroll Protection Program for small businesses, totaled $577 billion, compared with $456 million a year earlier. Spending by the Labor Department, which administers unemployment benefits, jumped to $477 billion in 2020 from $36.4 billion in fiscal 2019.

Spending for other safety-net programs, including Medicaid, Social Security and nutrition assistance, also climbed, along with outlays for new programs such as the coronavirus relief fund for cities and states and one-time $1,200 stimulus payments to households.

During the first half of fiscal 2020, federal receipts rose, as a strong economy and low unemployment boosted corporate and individual tax revenues. From April through October, however, receipts declined as the virus brought economic activity to a standstill, businesses shut down and more than 20 million workers lost their jobs.

Individual income and payroll taxes fell 7% in the second half of the year, while gross corporate tax receipts declined 15%, in part due to measures Congress enacted to help reduce taxes this year for businesses facing revenue losses, Treasury officials said.

Write to Kate Davidson at kate.davidson@wsj.com

 

Corrections & Amplifications

This article was corrected at 5:48 p.m. ET because the original version incorrectly said that William Hoagland is a senior fellow at the Bipartisan Policy Center. He is senior vice president.

(END) Dow Jones Newswires

October 16, 2020 16:52 ET (20:52 GMT)

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