2021 Deficit On Course to Hit $2.3 Trillion

In light of the enactment of the year-end spending and COVID relief deal, we estimate the deficit will total $2.3 trillion for Fiscal Year (FY) 2021. This would be lower than the $3.1 trillion deficit in FY 2020 but at an estimated 10.4 percent of Gross Domestic Product (GDP), it would be higher than any other time in recorded history outside of World War II.

Our estimates are rough and could change substantially when the Congressional Budget Office (CBO) releases its full score of the year-end package and updated budget projections later this month.

In September 2020, CBO estimated the deficit in FY 2021 would total $1.8 trillion, or 8.6 percent of GDP. Since then, Congress has enacted over $1 trillion of COVID relieftax extenders, and other policies. We believe roughly $750 billion of those funds will be dispersed in FY 2021. Partially offsetting this, we estimate economic and technical changes will reduce projected deficits by about $250 billion.

Estimated Change in 2021 Deficit From CBO Projection

  In Dollars Share of Economy
September Deficit Projection (CBO) $1.8 trillion 8.6% of GDP
Effect of COVID Relief, Tax Extender, and Omnibus Spending Package +$750 billion +3.6% of GDP
Economic and Technical Changes since July Forecast -$250 billion -1.2% of GDP
Higher Projected GDP Since July Forecast  N/A -0.6% of GDP
Updated Deficit Projection (CRFB) $2.3 trillion 10.4% of GDP

Source: CRFB calculations based on Congressional Budget Office data.

This $250 billion estimate is especially rough but is based mainly on the fact that we expect nominal GDP to be substantially higher in FY 2021 than CBO projected in July. The stronger-than-projected pace of the economic recovery, higher-than-expected inflation, growing vaccine availability, and enactment of additional stimulus should all increase nominal GDP relative to CBO’s prior estimates. While CBO estimated FY 2021 GDP of less than $21 trillion in July, we now believe it will exceed $22 trillion.

With deficits rising more than GDP, we estimate deficits will total 10.4 percent of GDP in FY2021, up from 8.6 percent in CBO's prior estimate. This increase is the net effect of a 3.6 percent of GDP boost from legislation changes and a 1.8 percent reduction as a result of newer economic forecasts.

Importantly, these estimates are rough. We look forward to more refined estimates that CBO usually releases later in the month.