Federal debt to exceed GDP in 2021: CBO

The Congressional Budget Office now says it projects federal debt will exceed GDP next year. Yahoo Finance’s Brian Sozzi, Alexis Christoforous, and Brian Cheung discuss.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, all that government borrowing to keep our economy afloat during the pandemic has put the country in a pretty precarious position. The congressional budget office now says it projects federal debt will exceed GDP next year. Our Fed Correspondent, Brian Cheung, is with us now. And Brian, I mean, I guess this is not a great big surprise here, but yet again, not much alarm on the street. Shouldn't there be?

BRIAN CHEUNG: Well, the CBO, again, not surprisingly coming out with some eye popping numbers. But when you consider that the federal government did spend $2.2 trillion on that CARES Act signed back in March, not many people can say that this is surprise. So as you mentioned, the nonpartisan CBO with report out yesterday saying the US budget deficit will hit $3.3 trillion this year. That deficit would make about 16% of GDP. That means that the total debt held by the government in levels is projected to rise to 100% of GDP in 2021. As you hinted, that would then rise to 107% in 2023.

According to the CBO's projections, that would be the highest in this country's history. That's more than deficits incurred also during World War II, obviously. But again, as I mentioned, $2.2 trillion spent by the CARES Act. In fact, there's still discussions down in Capitol Hill right now for another stimulus package, which would only further increase that budget deficit. A lot of people, even including Maya Macguineas, who's been a hawk down in DC saying, reduce the debt, has advocated for not focusing too much on the deficit numbers right now, because the government still needs that fiscal support with this crisis still ongoing.

BRIAN SOZZI: Brian, isn't the Fed partially to blame for this debt? I mean, the financing costs are essentially zero, and if they're going to stay that way for the foreseeable future, basically, debt is going way up.

BRIAN CHEUNG: Well, you can make the argument that, yes, the Federal Reserve is allowing the government to borrow cheap, because interest rates are near zero. And I think that the Federal Reserve officials would agree with that. That's what we heard from San Francisco Fed President Mary Daly. She was speaking yesterday to reporters, including myself, and she was saying that more fiscal support quote, "would be appropriate at this time."

She was describing the current situation, specifically with households, as a cliff, because you had a lot of these families relying on that extra unemployment insurance losing that when it expired some weeks ago. So that's definitely a concern. Government spending, however, is, again, still on the table for Republicans and Democrats down in DC. Although, who knows what the updated status is on that phase four package, but the clear message from Fed officials is that fiscal policymakers still have room and should be doing more to support this economy at a time.

BRIAN SOZZI: All right, Cheung. Thanks so much.