New Debt Has Paid for 76% of Federal Spending since 2020

Source: Library of Congress Prints & Photographs Division, LC-USZC4-8046

Before the COVID-19 pandemic, federal net spending as a percent of GDP was about 20%. At its peak in 2020, federal spending was 31% of GDP but remains much higher than the pre-2020 level despite the pandemic having ended.

The public perception seems to be that federal debt and the creation of money have paid for most, if not all, of the increase in spending. It’s not hard to see why. In fact, total debt has increased by 44% while debt held by the public has increased by $8.3 trillion (48%). Meanwhile, prices remain significantly higher than they were in 2020 because of inflation.

But exactly how much of the spending surge since 2020 has been paid for with additional taxes, new debt, and money creation?  In a paper published last year, economists George Hall and Thomas Sargent provide a way to calculate how the federal government has paid for spending growth. I use the same methods to update their analysis by estimating how the government has paid for the growth in spending from the beginning of 2020 until today.

Table 1 shows the increase in government spending, interest payments, and total asset purchases since Q1 2020 as a percent of GDP during one year of that period. The first row is identical to the estimates provided by Hall and Sargent. The second row shows a revised analysis that reflects both an increase in spending since the period covered by Hall and Sargent, but also reductions in the Federal Reserve’s balance sheet (“quantitative tightening”) since June 2022. These figures also include all the debt that the Federal Reserve has purchased over the period as well as interest that has been paid on reserves and reverse repurchase agreement options (“reverse repos”).

Table 1. Decomposition of new spending since Q1 2020.

Government SpendingPayouts on Net DebtAsset PurchasesTotalTax RevenuesDebt GrowthMoney Growth
Q1 2020 to Q4 2021*21.370.175.8527.390.95
Q1 2020 to Q3 2023**29.291.385.2835.952.59
*Hall and Sargent (2022); **Author’s calculations using methods in Hall and Sargent (2022) and data from the US Department of Treasury and the Federal Reserve.

Table 2 compares how spending increases since 2020 were paid for compared to spending increases that occurred during other major fiscal events. The spending decompositions from the wars are from two Hall and Sargent papers (found here and here). One of the differentiating features between the events is that the World Wars were much more reliant on taxes. This makes some sense given that government-imposed closures reduced economic activity, which would have reduced tax revenue in turn. Furthermore, increasing taxes to fund pandemic-era spending would have been countercyclical. However, as the economy has recovered and the pandemic has ended, federal spending continues to be paid for with high levels of government debt. This shows that about 76% of all spending growth since Q1 2020 has been paid for with new bonds. Meanwhile, about 14% has been paid for with money creation and 7% with tax revenues.

Table 2. Percent of spending paid for with taxes, bonds, and money.

TaxesNew BondsMoney Creation
Civil War*7%60%20%
World War I*21%75%7%
World War II*30%46%10%
Q1 2020 to Q4 2021*4%67%19%
Q1 2020 to Q3 2023**7%76%14%
*Hall and Sargent (2022); **Author’s calculations using methods in Hall and Sargent (2022) and data from the US Department of Treasury and the Federal Reserve.

Why does this matter? Although the economy is growing, and the labor market has recovered, the federal government continues to increase debt. In a paper I wrote earlier this year, I estimate that the federal government is beginning to exhaust its “fiscal space” (i.e., a measure of its borrowing capacity) that could threaten its ability to borrow money in the future.

Using the Congressional Budget Office’s assumptions for future spending and revenues, I estimate that about 80% of the exhaustion in the fiscal space over the next 30 years will be driven by net interest payments on the debt. The remainder will be primarily driven by unsustainable levels of health spending. I also estimate that the government’s fiscal space could be exhausted sometime after 2050, assuming the fiscal trajectory does not change.

This demonstrates the immediate need for policymakers to use opportunities when the economy is growing to reduce spending and debt.

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