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The effects of the COVID pandemic on the federal budget outlook

Author

Listed:
  • Alan J. Auerbach

    (University of California)

  • William Gale

    (Urban-Brookings Tax Policy Center)

Abstract

We examine the impact of COVID-19 on the federal budget outlook. We find substantial but temporary effects on spending and revenues, with more moderate but permanent effects on the long-term projections. We project that the debt-to-GDP ratio, currently 98%, will rise to 190% in 2050 under current law, compared to a CBO pre-COVID projection of 180%. Sharply lower interest rates projected for the next dozen years help moderate future debt accumulation. Under a “current policy” projection that allows temporary tax provisions—such as those in the Tax Cut and Jobs Act of 2017—to be made permanent, the debt-to-GDP ratio would rise to 222% by 2050 and would continuing rising thereafter. The long-term projections are sensitive to interest rates. We discuss several aspects of these results, including how the current episode compares to past debt changes, the role of historically low interest rates, and the role of recent Federal Reserve Board policies and actions. Because of the macro-stabilization effects of fiscal tightening, and because low interest rates create “breathing room” for fiscal policy, we do not see the large, short-run debt accumulation resulting from the current pandemic as necessitating any immediate offsetting response. But the long-term projections show that significant fiscal imbalances remain and will eventually require attention.

Suggested Citation

  • Alan J. Auerbach & William Gale, 2020. "The effects of the COVID pandemic on the federal budget outlook," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 55(4), pages 202-212, October.
  • Handle: RePEc:pal:buseco:v:55:y:2020:i:4:d:10.1057_s11369-020-00188-y
    DOI: 10.1057/s11369-020-00188-y
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    References listed on IDEAS

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    1. Congressional Budget Office, 2020. "The Budget and Economic Outlook: 2020 to 2030," Reports 56020, Congressional Budget Office.
    2. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
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    5. Ball, Laurence & Elmendorf, Douglas W & Mankiw, N Gregory, 1998. "The Deficit Gamble," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 699-720, November.
    6. Congressional Budget Office, 2020. "The 2020 Long-Term Budget Outlook," Reports 56516, Congressional Budget Office.
    7. Douglas W. Elmendorf & Louise M. Sheiner, 2017. "Federal Budget Policy with an Aging Population and Persistently Low Interest Rates," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 175-194, Summer.
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    9. Congressional Budget Office, 2020. "An Update to the Budget Outlook: 2020 to 2030," Reports 56517, Congressional Budget Office.
    10. Gale, William G., 2019. "Fiscal policy with high debt and low interest rates," MPRA Paper 99207, University Library of Munich, Germany.
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    Cited by:

    1. E. S. Vylkova, 2022. "Tax Policy in the COVID-19 Pandemic: A Review of Publications in Leading Economic Journals," Administrative Consulting, Russian Presidential Academy of National Economy and Public Administration. North-West Institute of Management., issue 12.

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