COVID-19’s impact on the government debt outlook

Russell Price, Chief Economist, Ameriprise Financial

The headquarters of the US Treasury

Key Points

  • The COVID-19 pandemic has made the high government debt situation worse, but low interest rates should keep it manageable over the intermediate-term.
  • Sooner, rather than later, elected officials will need to address the debt situation, likely via a mix of higher taxes, reduced spending or policies that enhance economic growth.
  • The longer it takes to put the federal budget on a sustainable long-term path, the more difficult the adjustments will need to be.

U.S. government debt was high and growing steadily as we entered 2020. Unfortunately, the federal policy actions necessary to support the economy as a result of the COVID-19 pandemic required a further surge in borrowing, making the government debt picture that much more challenging.

Over the first five months of 2020, U.S. government debt jumped $2.8 trillion, or about 16%, according to Treasury Department figures. The increase primarily reflected the four stimulus bills enacted since late February, totaling approximately $2.9 trillion, according to Bloomberg.

Based on legislation passed through the end of April, the Congressional Budget Office (CBO) now estimates a budget deficit of $3.7 trillion for fiscal 2020 (the federal fiscal year ends Sept. 30), and $2.1 trillion for fiscal 2021. As recently as March, the CBO projected deficits of about $1 trillion for both years.1


Was it worth it?

The economic downturn would have been much deeper and lasted longer without government support, in our view. A smaller economic base would have made dealing with the nation’s debt burden, even at prior levels, more challenging and would have had a further negative impact on people’s lives.

Prior to the pandemic, the CBO projected U.S. government debt would grow steadily, eventually equaling the size of the underlying economy, or Gross Domestic Product (GDP), by 2031. Similar to how those with higher incomes can afford higher debt levels, this ratio — commonly referred to as “debt to GDP” — is an indication of how much debt a country may be able to afford. 

Given the massive stimulus spending and lower tax revenues of the pandemic period, the CBO now forecasts government debt will reach 100% of GDP by the end of September, nearly 10 years sooner than its pre-pandemic forecast.1


How much debt is too much? 

Though undoubtedly problematic, we believe the government debt situation should remain manageable for several years at least. The manageability of debt for any government is primarily a function of its debt servicing cost; in other words, how much it spends on interest expenses.

In 2019, interest expense paid on the federal debt cost the federal government (i.e., taxpayers) an amount equal to 1.8% of U.S. GDP, according to the CBO. Despite the higher dollar amount of debt outstanding, the percentage was below the 50-year average of 2.0% because of lower interest rates on bonds. 

Recently, interest rates on government debt have shifted even lower. For example, in 2019 the average interest rate on the government’s 10-year Treasury security was 2.11%. From March through June of this year, the 10-year Treasury has paid an average interest rate of 0.68%, thus lowering the overall cost of government borrowing.     

Elected officials should use this period of low rates to enact policies that eventually put the debt on a more sustainable path. Such measures are likely to require a mix of higher revenues (taxes) reduced spending and policies that foster stronger economic growth.     



The COVID-19 pandemic has made the troubling U.S. debt situation worse, but relatively low interest rates should keep the situation manageable over the intermediate term, in our view. However, higher tax rates and reduced spending are likely part of an eventual solution to curb federal debt. 

If you have questions or concerns about your financial goals during this period of uncertainty, talk to your Ameriprise Financial advisor. They know your situation best and will continue to help you navigate potentially higher tax rates or other changes in government policy.


Data source: Unless otherwise noted, all statistical information and graphs are from FactSet as of 6/30/20.

FactSet is an independent investment research management company that compiles and provides financial data and analytics to firms and investment professionals. 

1 Congressional Budget Office, CBO’s Current Economic Projections and a Preliminary Look at Federal Deficits and Debt for 2020 and 2021, April 27, 2020.