SAN FRANCISCO (Reuters Breakingviews) - A large coronavirus-related fiscal stimulus is good for America and bad for its bloated balance sheet. Congress on Thursday approved $8.3 billion to mitigate a potential outbreak. That number is misleading though, because in reality hundreds of billions more may be needed to stem economic damage. The problem is that the deficit is already $1 trillion, pushed up by tax cuts and higher spending the economy didn’t obviously need.
The package the Senate has approved for vaccine development and other needs is bigger than President Donald Trump’s $2.5 billion request, but it’s still a rounding error. Others are less optimistic. Senator Elizabeth Warren – until Thursday herself running for the White House – has proposed a $400 billion plan for low-interest government loans to help businesses and expand unemployment insurance, among other benefits.
The government’s financial health was already deteriorating. The deficit had nearly halved between 2012 and 2016 but has been rising. Republican tax cuts caused federal tax revenue to fall by 0.4% in 2018, and it was nearly flat the following year despite a healthy economy and low unemployment rate. That plus a spending increase resulted in a debt-to-GDP ratio of 81% this year, according to the nonpartisan Congressional Budget Office.
Tax revenue will suffer as companies grapple with falling profit due to the virus. The International Air Transport Association said on Thursday that annual global airline revenue could fall by up to $113 billion. Apple and Microsoft are among the firms that have sounded a warning.
Even without the virus factored in, the CBO projected that the U.S. debt-to-GDP ratio would hit an unhealthy level of 98% by 2030. In 2019, the government also projected that the Social Security trust fund would run out of money by 2035, forcing a cut in benefits, while the Medicare hospital insurance trust fund would be depleted in 2026.
About $17.8 trillion of U.S. debt is held by the public, including foreign governments like China. Right now, yields on U.S. government debt are falling to record lows. As finances worsen, though, and the crisis driving investors into U.S. bonds abates, Treasuries will look less attractive. The fiscal room to deal with crises, already lower than it needed to be, could soon be strained to the max.
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