The deficit in the first eight months of the 2020 fiscal year hit a record $1.9 trillion, surpassing the largest annual deficit on record, $1.4 trillion in 2009.
Treasury Department data released today found that the deficit for May hit $399 billion, the second highest monthly level after April’s record-shattering $738 billion figure.
The huge rise in borrowing in recent months has come in response to the coronavirus pandemic, which prompted Congress to approve some $3.6 trillion in emergency aid, relief, stimulus and public health funding.
Economists say that borrowing money to prevent economic collapse is a good investment, and if done right can lead to both better economic outcomes and lower debt levels than austerity measures in a crisis.
For example, nearly a fifth of the spending in the 2020 fiscal year, which began in October, went toward income security.
But budget hawks have also been quick to note that aid should be targeted and that once that crisis is over, the government will face serious challenges in managing its debt burden.
The Congressional Budget Office has estimated that based on bills currently signed into law, the deficit for the year is likely to approach $4 trillion, several times the previous record.
The overall level of debt the government owes is set to surpass annual economic output this year for the first time since World War II, and is likely to break records in the coming years.
Once businesses start to reopen and growth returns at lower levels, the likelihood of tax increases on both the federal and state levels is high, according to Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute, a division that supports wealth and investment management of Wells Fargo.
Higher debt levels tend to be a drag on growth and lead to the likelihood of lower investment returns, but also lower inflation.
“Expect to see a continuation of the trends we saw in the last decade during 2008 to 2009, but this time the magnitude is greater,” he said. “The same trends will continue – low interest rates, low growth levels, low inflation and lower investment returns, but higher taxes.”