The Effects of Pandemic-Related Legislation on Output

In March and April of 2020, four major federal laws were enacted in response to the 2020 coronavirus pandemic. Those laws, which contained a wide array of conventional and unconventional fiscal policies, will add $2.3 trillion to the deficit in fiscal year 2020 and $0.6 trillion in 2021, according to the Congressional Budget Office’s estimates.

By providing financial support to households, businesses, and state and local governments, the legislation will offset part of the deterioration in economic conditions brought about by the pandemic. CBO estimates that the legislation will boost the level of real (inflation-adjusted) gross domestic product (GDP) by 4.7 percent in 2020 and 3.1 percent in 2021. From fiscal year 2020 through 2023, for every dollar that it adds to the deficit, the legislation is projected to increase GDP by about 58 cents. In the longer term, the legislation will reduce the level of real GDP, CBO estimates. All of those estimates are subject to considerable uncertainty.

Short-Term Effects

In the short term—that is, from 2020 through 2023—the pandemic-related legislation will affect the economy through several channels. Payments and tax credits issued to individuals will boost the overall demand for goods and services by providing resources to households, many of which have experienced a significant loss in income. Loans, grants, and tax benefits will provide liquidity to businesses experiencing financial distress, increasing the likelihood that they will survive and preserve jobs for their employees while economic activity is weak. Federal assistance to state and local governments will help pay for rising expenditures related to the pandemic as those governments’ tax revenues fall. And payments to health care providers will help support further testing for and treatment of COVID-19, the disease caused by the coronavirus.

Over the next several years, as a result of the pandemic, output is projected to remain well below its potential level, and inflation is projected to stay below the Federal Reserve’s long-run objective. CBO therefore expects that the Federal Reserve will not respond to the legislation’s effect on demand by raising short-term interest rates. So the boost to output is expected to be larger than it would have been if output had been closer to its potential and inflation had been higher, because then the Federal Reserve would have been more likely to respond.

In CBO’s assessment, the short-term boost in economic activity caused by the legislation will be tempered by social distancing, especially during the second and third quarters of this year. Social distancing refers to certain actions that households, businesses, and governments in the United States and around the world have taken to limit in-person interactions and thus slow the spread of the coronavirus. Those actions include reducing social activities, dining out, and travel; curtailing the activity of schools and businesses; prohibiting large gatherings; and working from home. CBO estimates that social distancing will cause the economic boost resulting from the legislation to be smaller than it would have been during a period without social distancing. CBO also expects that some of the spending by individuals and businesses that is hampered in the near term by social distancing will resume as those measures continue to ease.

Longer-Term Effects

The legislation will increase federal debt as a percentage of GDP, and in the longer term, CBO expects that increase to raise borrowing costs, lower economic output, and reduce the income of U.S. households and businesses. In addition, the higher debt—coming at a time when the longer-term path for debt was already high—could eventually increase the risk of a fiscal crisis or of less abrupt economic changes, such as higher inflation or the undermining of the U.S. dollar’s predominant role in global financial markets. The timing and likelihood of those effects are not possible to estimate with precision.

Uncertainty

CBO’s estimates of the economic effects of the legislation are subject to considerable uncertainty and represent the middle of the distribution of potential outcomes. Some important sources of that uncertainty are how consumers and businesses may respond to various policy changes included in the legislation; how the timing, scale, and breadth of the legislation may affect consumers’ and businesses’ confidence; how responses to policy changes may be altered by the pandemic and social distancing; what the course of the pandemic may be; how social distancing may change; and how quickly safe and effective vaccines and therapies may become widely available.

The Legislation

This past March and April, four major federal laws were enacted to address the public health emergency created by the pandemic and to directly assist households, businesses, and nonfederal governments affected by the economic downturn. The Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 (Public Law 116-123), and the Families First Coronavirus Response Act (P.L. 116-127) increased federal funding for some federal agencies and for state and local governments, required employers to grant paid sick leave to employees, and provided payments and tax credits to employers. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) provided loans to businesses, payments to health care providers, payments and tax credits to individuals, additional funding to state and local governments, and reductions in certain business taxes. Finally, the Paycheck Protection Program and Health Care Enhancement Act (P.L. 116-139) increased federal funding for the loans to businesses and payments to health care providers supplied in the CARES Act.

This report analyzes the following provisions in the four laws.

• Paycheck Protection Program and Related Provisions. Through the Paycheck Protection Program (PPP), the legislation funds loan guarantees for loans to small businesses to help them cover payroll and other costs. CBO expects most PPP loans to be forgiven, so they will effectively become grants. In addition, the legislation allocates funds to the Small Business Administration (SBA), which lends them to businesses, provides debt relief, and administers the Economic Injury Disaster Loan (EIDL) program. That program provides grants to businesses experiencing a temporary loss in income.
• Enhanced Unemployment Compensation. The legislation temporarily increased unemployment benefits by $600 per week through July 31, 2020. In addition, the legislation created a temporary program for people not otherwise eligible for unemployment benefits, such as self-employed workers and independent contractors, and extended the number of weeks of federally funded benefits available to beneficiaries who qualified for regular unemployment insurance in 2020. Finally, the legislation allowed states to waive work-search requirements for people receiving benefits.
• Recovery Rebates for Individuals. The legislation provides a refundable tax credit of $1,200 per qualifying adult and $500 per dependent child to taxpayers with income below specified limits. The tax credit begins phasing out once the income of individuals and of married couples filing jointly passes $75,000 and $150,000, respectively.
• Direct Assistance for State and Local Governments. The legislation provides grants to state and local governments—and to tribal and territorial governments as well—for spending related to the pandemic.
• Other Spending Provisions. The legislation provides funding to the Department of Health and Human Services, the Department of Defense, the Department of Agriculture, the Department of Housing and Urban Development, the Federal Emergency Management Agency, the Department of Veterans Affairs, and the Department of Transportation. It also increases funding for the Supplemental Nutrition Assistance Program and for public health programs, such as Medicaid and Medicare. Furthermore, it provides aid to people who have student loans (by temporarily suspending their loan payments), credit assistance to airlines and other businesses, and relief to aviation workers.
• Other Revenue Provisions. The legislation modifies the rules relating to net operating loss deductions and increases the limits on the losses and on the business interest deductions that businesses can use to offset their taxable income. Those changes provide businesses with liquidity by letting them claim certain tax benefits sooner than they would otherwise have been able to. The legislation also provides payroll tax credits to employers to encourage them to retain employees, along with refundable credits to compensate them for providing paid sick leave and family and medical leave. It delays payroll tax payments by businesses, further providing temporary liquidity. And it shifts some of the costs of unemployment benefits from state and local governments and nonprofits to the federal government.
• The Federal Reserve’s Emergency Lending Facilities. The legislation provides loss-absorbing capital to Federal Reserve programs called facilities, which act as a backstop to financial markets by making loans or purchasing assets under the Federal Reserve’s emergency lending authority.

In total, the pandemic-related legislation is projected to increase the federal deficit by about $2.3 trillion in fiscal year 2020 and $0.6 trillion the following year (see Table 1). Those amounts equal about 11.2 percent of GDP in 2020 and 2.7 percent in 2021. Over the 2020–2030 period, the laws are projected to add $2.6 trillion to the deficit (an amount that does not include budgetary changes resulting from the laws’ effects on the economy).

Some measures recently taken by the Federal Reserve are not analyzed in this report. The Federal Reserve lowered its target range for the federal funds rate—the interest rate that financial institutions charge each other for overnight loans of their monetary reserves—nearly to zero. It also established several facilities, some of them similar to those created during the 2007–2009 financial crisis, to support certain financial markets and to help corporations and municipalities raise funds. And it made temporary adjustments to regulations to let banks expand their balance sheets to support their customers.