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Bruno Cavalier
Chief Economist at ODDO BHF

In just a few months, the federal budget deficit widened by around 10 points of GDP, flirting with the 14% of GDP threshold. For the time being, this exceptional fiscal support has helped preserve household income and corporate access to credit. But it is running out of steam as the pandemic continues to spread. It is widely acknowledged that fresh support for households and local governments is needed to ensure that the recovery is confirmed (one of Trump’s last cards to play). The amount and details are yet to be confirmed by Congress but a conservative estimate would see the deficit head towards 20% of GDP.

The week's focus

Over the first nine months of the fiscal year, the federal budget deficit is already flirting with the $ 3,000bn level, i.e. 14% of GDP. The current budget situation can only be compared with the civil war or the two world wars (chart lhs). The widening of the deficit reflects the rise in transfer spending aimed at cushioning the shock of the pandemic, and, to a lesser extent, the loss of tax receipts (chart rhs). The CARES Act and other legislation passed since the spring have so far provided a fiscal stimulus of $ 2.4bn¹. In addition to providing for businesses, this plan is intended to protect households. As a result, despite the rise in unemployment, their available income has increased. The flagship measure, which is an exceptional payment of $ 600 per week to jobless claimants, is nonetheless due to expire at the end of the month.

Despite the electoral contest, the two parties know that they must reach an agreement to extend the support, without which, the economic and social cost would soar, and no one wants to be blamed for such a failure. The surge in the pandemic, which has been resolutely confirmed since mid-June, underpins the need to act. However, opinions diverge concerning the form and amounts this help will take. The Democrats project (HEROES Act) would apparently cost $ 3tn. It plans to extend the bonus payment to jobless claimants by six months (before gradually reducing the payment in 2021), to send a new, more generous stimulus check, and to provide aid for local government finances. The details of the Republicans’ plan have not yet been published. Press leaks put the bill at 1.3tn², with support measures for households and local governments albeit less generous than in the Democrats’ plan. Initially, Republicans were reluctant to accommodate some of their opponents' demands, but the recent trend in political polls no longer permits a wait-and-see stance. Given Biden’s current lead over Trump, if the elections were held today, the Democrats would not only win the White House but also the House of Representatives and the Senate.

¹ CBO, The Budgetary Effects of Laws Enacted in Response to the 2020 Coronavirus Pandemic, March and April 2020

² CNN, Prospects slim for new recovery package as Dems scoff at emerging Senate GOP proposal

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