Apparently, the hard-working analysts at the Congressional Budget Office threw in the towel on Friday afternoon. They were scheduled to release their estimates of the budget deficit for July but, late in the day, the CBO website announced that the numbers would be coming out today instead. 

It’s hard to blame them. Balancing the national checkbook is challenging at the best of times and, no doubt, the pandemic is complicating their operations. Added to this, they have to incorporate the impacts of the numerous fiscal measures already enacted to reduce the severity of the recession. They may also have wanted to put in a long weekend before adding the effects of the next coronavirus relief bill to their bulging spreadsheets.

We do still believe that such a bill will be forthcoming in the next week or two. 

Negotiations appeared to break down late last week and the President announced executive actions on some of the contentious issues. However, for all practical purposes, the President does not have the authority to cut taxes or increase spending without the consent of Congress and the stopgap measures announced over the weekend will need to be replaced by a more comprehensive bill.

We continue to believe that this bill will include a partial extension of enhanced unemployment benefits, further one-time checks to taxpayers, some more money for state and local governments, some legal protection for businesses reopening during the pandemic and a continuation of moratoriums on evictions and foreclosures on properties with at least partial federal financing. The total cost of the measure will likely be between $1 and $2 trillion, on top of the roughly $2.4 trillion already approved for coronavirus relief. In addition, after the election, a further fiscal support measure is likely, likely costing a further $1 to $2 trillion, until, hopefully, the need for such relief diminishes in 2021 with the widespread distribution of a vaccine.

Most investors, and, for that matter, most Americans, are focused on the timetable for getting past the pandemic and returning to normality. However, it is important to recognize the further major damage that this recession and relief measures are inflicting on the public finances and consider the implications of that damage for investing going forward.

In broad numbers, in fiscal 2019, which ended on September 30 of last year, the federal government ran a deficit of $984 billion, or 4.6% of GDP. It should be emphasized that this implies a very serious structural budget deficit, even before the pandemic, since the economy was essentially at full employment in the 11th year of expansion. The federal debt in the hands of the public at that time was $16.8 trillion, or 79.2% of GDP. 

We now expect deficits of roughly $3.5 trillion in fiscal 2020 and $3.0 trillion in fiscal 2021, bringing the debt to $23.3 trillion or 106.5% of GDP by September 30, 2021, just below the 108.2% of GDP peak reached in 1946 as the U.S. government faced the colossal debt racked up in fighting World War II. 

Many worry that this level of debt will result in a fiscal crisis. 

It doesn’t have to—provided that, once the pandemic is over, the federal government acts with discipline, the Federal Reserve maintains a relatively dovish stance and inflation remains low. 

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