CBO projects December’s COVID-19 relief package to boost economy 1.5 percent

The Congressional Budget Office (CBO) in a report released Monday projected that the COVID-19 relief package Congress passed in December will lead to the economy growing 1.5 percent faster on average in both 2021 and 2022.

“Those provisions will boost the level of real GDP by 1.5 percent, on average, in calendar years 2021 and 2022, CBO estimates; the bulk of the impact will occur in 2021,” the report said.

CBO staff said the the boost would be concentrated in the first quarter of 2021.

The measure will add a combined $872 billion to the deficit over the two-year period.

The CBO’s updated economic forecasts see the economy growing at a breakneck pace in 2021 as vaccines are administered, social distancing measures are eased and the economy emerges from the whole of the COVID-19 pandemic.

The economy is projected to grow at 4.6 percent this year as unemployment drops to 5.3 percent in the last quarter. In 2022, growth would slow to 2.9 percent, and unemployment would fall to 4.9 percent by the last quarter.

Unemployment would remain at about 4.1 percent in the latter part of the decade, a relatively low level, but higher than the 3.5 percent low hit during the first years of the Trump presidency. The economy will only reach its pre-pandemic growth level in the middle of this year.

The CBO released its economic forecasts ahead of its budget projections in an attempt to help negotiators navigate the next COVID-19 relief bill.

Democrats are leaving open the possibility of advancing President Biden’s $1.9 trillion proposal through budget reconciliation, a process that will allow them to avoid a GOP filibuster in the Senate.

But Biden says he prefers a bipartisan proposal, and is set to meet with a group of 10 Republican senators Monday evening to discuss their $618 billion counteroffer.

The CBO said that its projections were uncertain and subject to change, particularly in the face of new legislation or changes in the pandemic trajectory. A faster pace of vaccination, for example, could lead to a faster recovery, as could a major fiscal boost. But experts are also worried that new variants of the coronavirus could lead to a rise in new cases that could slow the recovery.

The Federal Reserve has encouraged Congress to provide major fiscal relief, cautioning that undershooting is a bigger economic risk than overshooting, but has not weighed in on exactly how big a fiscal package should be.

Gene Sperling, who was the director of the National Economic Council under Presidents Clinton and Obama, said the CBO projections supported Biden’s larger proposal.

“Everything here confirms that the risks of going too small dramatically outweigh the risks of going too large,” he said.

In particular, he noted the danger of a slow return to full employment, which he said would leave millions of job-seekers out in the cold. 

Last month, Federal Reserve Board Governor Lael Brainard said that the unemployment problem was dramatically worse for people at the bottom of the income spectrum. The bottom quarter of earners face an unemployment rate of over 20 percent, about triple the 6.7 percent average.

“This is not about numbers, it’s your neighbors,” Sperling said.

One factor in the CBO report that could catch the attention of negotiators is that inflation is expected to remain in check, staying below 2 percent in the coming years and remaining at an average of 2.1 percent in the latter part of the decade. 

That could assuage concerns about increasing deficits too much, which could lead to an “overheated economy” that sees prices soar and interest rates spike.

Sperling noted that the projected cost of servicing debt over the next decade actually fell from before the pandemic to after the passage of the $3 trillion Cares Act in March.