US deficit could top $3.7 trillion due to recession and coronavirus stimulus: CBO

US gross domestic product is estimated to shrink by almost 40% on an annualized basis in the second quarter

With companies and stores shut down due to coronavirus and the government spending aggressively on testing, healthcare and aid to businesses and households, US federal deficit could reach $3.7 trillion this fiscal, cautioned the Congressional Budget Office (CBO). Government's budget for 2020 in all probability is going to explode after four rounds of stimulus already injected into the economy as the country struggles to contain the spread of the deadly coronavirus and get back to normalcy.

The CBO also said that the economy would bounce back in the second half of the year although unemployment rate will continue to remain in double digits till the end of next year. The United States has been one of the hardest hit by the coronavirus pandemic, with deaths surpassing 51,000 on Saturday. The US economy has already entered recession and is struggling hard to bounce back.

US GDP to plunge in second half of the year

US storm
American flags partially torn from their poles fly as a storm producing strong winds passes through Washington, U.S., March 2, 2018. Reuters

According to CBO's forecast, US gross domestic product will shrink by almost 40% on an annualized basis in the second quarter. The Congress has already passed a whopping $3 trillion in coronavirus aid aimed at helping healthcare, small businesses, airlines and other measures. This will pile more than $2 trillion onto the $24.6 trillion national debt with only six months left in the current fiscal year.

This is more than double the deficit record set during President Barrack Obama's first year in office when US was hit by the Great Recession. "If the laws currently in place governing spending and revenues generally remained unchanged and no significant additional emergency funding was provided, the federal deficit would be roughly $3.7 trillion in fiscal year 2020 and $2.1 trillion next year," the CBO said.

Fiscal debt to grow through 2021

Congress is in for a rough september

The CBO sees federal debt to grow over the next few quarters. It forecasts federal debt to equal 101% of the country's gross domestic product by September 30, when the 2020 federal fiscal year ends. It would further grow and equal 108% of GDP by September 30, 2021.

The congressional forecasters last months had said that fiscal deficit in each of those years would be around $1 trillion. However, with no signs of the pandemic easing and a couple of more rounds of stimulus announced this month, the debt is expected to quadruple.

However, they also said that the economy is likely to start bouncing back from the second half of the year, although unemployment rate will peak to 16% and will continue to remain in double digits through 2021. The $3.7 trillion deficit has been forecast keeping in mind that no further stimulus is injected into the economy. Additional economic stimulus legislation could further shoot the deficit to over $4 trillion.

Related topics : Coronavirus