Coronavirus has shutdown much of the world for the past 8 months, and in the past two weeks we have covered how small business and sports have been affected. Business and sports related shutdowns have had visible effects in people’s daily lives, however there is a dire, more invisible consequence of coronavirus- the government deficit.
When the United States shut down in March and April, the government became the primary source of income for millions of Americans. This put an enormous financial strain on an already heavily indebted government. All levels of government- from federal to state to even local are now reeling from the astronomical spending, decreased tax revenue, and chaos from the pandemic.
The Federal Response
Starting from the highest level of government, the federal government response to the pandemic was unprecedented. The primary bill for coronavirus relief- the CARES act (Coronavirus Aid, Relief, and Economic Security Act) cost an estimated $2.2 trillion. The CARES act is the largest economic stimulus in United States history. For comparison, the 2009 relief packages was only $831 billion. A breakdown is below showing where the funds where allocated.
Small Business Relief or Corporate Bailout?
The first item on the graph- corporate loans, is the cause of much controversy. “Bailouts” are nothing new to politics, however it is never popular to add a massive government deficit to save large corporations. Unfortunately, it mostly is a secret as to what large corporations got money- and how much. However, the Paycheck Protection Program, a program that was meant to offer payroll relief to small businesses, was criticized as it allowed large public companies to receive relief funding. The program was capped at $349 billion, so it ran out before every small business that needed relief received funding. Below is a chart from CNBC that shows the largest loans that were distributed to public companies via PPP.
Funding for the Paycheck Protection program quickly ran out. In less than two weeks, the $349 billion allocated for small businesses was gone. Outrage from normal people to journalists and politicians followed. Shortly after, Congress quickly passed PPP part 2, which allocated an additional $320 billion was allocated to the program, which allowed for suffering small business to get the relief they need.
All in, the federal government spent over $2.5 trillion on relief programs from the pandemic. The US national debt is now $27 trillion with the government deficit reaching $3.1 trillion and growing.
Most of the national news cycle has focused around the federal government. Specifically, everyone talks about the federal government’s budget deficit and the national debt. However, and arguably more important, is the deficits that states are currently running. State governments are responsible for roads, education, pension funding, and other things that affect daily life much more than the federal government. State deficits, however, were not caused by massive relief programs. Rather, states have large responsibilities that require tax revenue to continue operating. When businesses were shut down, tax revenue took a massive hit. In states where large amounts of spending is subsidized with higher taxes, this was crippling.
The National Conference of State Legislatures released a projection on the severity of each state’s tax revenue situation. Every state is going to have a squeezed budget for 2021, however states with high taxes are in real trouble. California and Colorado are projecting a nearly 20% decrease in state tax revenue for 2021. That is an astronomical loss considering how large those states’ budgets are. It also is important to keep in mind that state budget deficits are more dire than federal deficits. This is because:
- States cannot issue debt the way the federal government can.
- States cannot print their own currency or the USD like the federal government.
- States cannot borrow money internationally.
All things considered, these three mechanisms have kept the United States government running even with $27 trillion of debt. States, though, do not have access to these levers. Most state constitutions require a “balanced budget” to be passed by the governor every year. With tax revenue dropping so dramatically this year and next, many states now must begin to massively cut back on spending unless the federal government is able to offer relief.
Federal Relief to States
Since the pandemic began, governors from across the country have called on the federal government to offer relief. A total of $150 billion was allocated for relief to the states in the CARES Act. These funds have rules to how they can be spent, however. States are still figuring out how they are allowed to spend the funding. However, it is clear that the federal government has taken some action in offering states some help.
As with everything with government, politics has caused issues. Specifically, Democrat governors are accusing the Republican Senate and Donald Trump of “punishing” blue states. Due to these states having higher tax bases and spending, they are seeing the largest negative effects from the shutdowns. Democrat governors like, Andrew Cuomo, argue that there is not enough relief funding to cover their expenses, and a more proportionate amount of funding should be allocated towards their states.
Alternatively, Republicans argue that Democrats are asking the federal government to essentially bailout fiscally irresponsible states. It is no secret that blue states like Illinois and New York have a ballooning spending problem, and Republicans feel that governors are taking advantage of the funding to continue their spending spree. You can decide who is correct, but it is important to understand both sides of this equation.
Perhaps the most overlooked officials are local governments. Unlike the federal government, which actually affects most people’s lives very little, local governments determine policy that is relevant to almost everyone. Though they get the smallest amount of the news cycle, local governments run and employ police departments, sanitation, fire departments, public safety, hospitals and healthcare, and a plethora of other important societal functions. Like states, local governments have very few options in financing. Local officials know running a deficit for too long could bankrupt a town, so they usually try to be fiscally responsible.
The National Association of Counties (NACo) recently released a report to outline the grim situation local governments face. The NACo report explains how counties all over the United States are going to be impacted by up to $144 billion through 2021.
Ironically, it is the local governments’ deficits that will cause the greatest disruption in daily lives, however it gets the least amount of attention. Should local governments have to make large budget cuts, there will be less police, fire fighters, teachers, and hospital workers in everyday communities.
The pandemic has been ongoing for nearly 8 months now. The question on everyone’s mind is- “Where do we go from here?”. In November politicians will be up for re-election, and their visions will be either rejected by the American people, or embraced as our way forward. Either way, recovering from this pandemic will be a challenge for everyone, not just governments.