Debt-To-GDP Ratio Surpassed 100% In 2020 And Is Expected To Again In 2021


U.S. debt compared to the size of the economy has hit its highest level since WW II, its expected to surpass it in 2021.

On Wednesday, the Congressional Budget Office said that debt held by the public is projected to exceed 100% of U.S. gross domestic product, in the fiscal year that begins on Oct. 1 joining Japan, Italy and Greece whos debt is greater than their GDP. (2020 is expected to be 98%)

The yield on the benchmark 10-year U.S. Treasury fell Wednesday to 0.643%, from 0.672% as stocks soared. (Bond yields drop as equity prices rise)

In the quarter between April and June government spending catapulted because of the massive spending due to the new coronavirus. In fact it during this time federal debt broke the 100% of GDP mark for the first time in more than 70 years. (last time this happened was 1946). Policy makers have approved roughly $2.7 trillion in spending since March for testing and vaccine research, aid for hospitals and economic relief for businesses, households and state and local governments. (Federal revenue fell 10% from April through July).

By the end of June, total debt had swelled to $20.5 trillion from $17.7 trillion at the end of March, a 16% increase. Additionally, the economy shrank 9.5% in the second quarter, bringing debt as a share of GDP to 105.5%, compared with 82% in the first quarter.

“It was a massive rise in borrowing and quite shocking, but incredibly effective,” said former CBO chief economist Wendy Edelberg, who in June became director of the Hamilton Project, a think tank affiliated with the Brookings Institution. “On the flip side, this is exactly why we, as a country, want to have room to increase borrowing during times of emergency.”

“There’s no economic difference between a ratio of 99% and a ratio of 101%,” Ms. Edelberg said. A more useful measure of the country’s fiscal health is its debt-to-GDP trajectory, she added.

National debt hasn’t been a priority of either political party recently. Democrats have pushed for another broad-based, $3.5 trillion relief package, while the White House and Senate GOP have sought to cap the bill at $1 trillion and some have even argued against any additional relief measures completely. House Speaker Nancy Pelosi said last week that Democrats would be willing to accept a $2.2 trillion relief package.

Prior to the relief packages the deficits and debt were already projected to rise over the coming decades. This was based on an aging population which increases the cost of Social Security and Medicare. The U.S. is the only country whose debt-to-GDP ratio is expected to continue rising after 2021. It is also expected to record the biggest jump in debt-to-GDP this year among advanced economies, including Germany, France, Italy and the U.K.

“In the short term you have to spend what it takes to minimize the recession and keep the economy afloat,” said Brian Riedl, a senior fellow at the conservative Manhattan Institute for Policy Research. “But the soaring debt to GDP ratio is totally unsustainable, even if interest rates remain low.” Interest costs are expected to top out at $1 trillion a year by the end of the next decade, Mr. Riedl estimates.

Federal Reserve Chairman Jerome Powell and some economists have said Congress needs to do more to support the nascent recovery, especially with unemployment in double digits and the virus continuing to spread throughout the country.

“I think we’re going to continue to see the U.S. economy recover,” Tyler Goodspeed, the acting chairman of President Trump’s Council of Economic Advisers, said at a press briefing last month. “It would recover a lot faster, and with much less long-term scarring, with additional support.”

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Economics, Finance and Investing