In a June 1, 2020 letter in response to an inquiry from Senator Schumer, the CBO noted that it will take until 2030 for U.S. GDP to return to recover from the effects of the COVID-19 pandemic.
Specifically, the CBO projects with respect to nominal GDP: “Over the 2020-2030 period, cumulative nominal output will be $15.7 trillion less than what the agency projected in January . . . That different constitutes 5.3 percent of the value of the cumulative nominal GDP for that period that the agency predicted in January.”
And, with regard to real GDP the CBO now projects: “[O]ver the 11-year horizon, cumulative real output (in 2019 dollars) will be $7.9 trillion, or 3 percent of cumulative real GDP, less than what the agency predicted in January.”
On Thursday May 28, 2020, the House passed H.R. 7010, the Paycheck Protection Program Flexiblity Act of 2020 by a vote of 417-1. The legislation would relax various requirements for small businesses accessing the loans and loan forgiveness originally provided in the Paycheck Protection Program (PPP) enacted in H.R. 748 on March 27, 2020. In particular, H.R. 7010 would extend the period of time businesses have to spend their PPP loans and would reduce the percentage that must be spent on payroll (from 75% to 60%) to qualify for loan forgiveness. Additionally, for those loan funds that must be repaid, the bill delays and extends the repayment period.
The CBO has updated its economic projections through the end of 2021 to account for the 2020 coronavirus pandemic. The CBO estimates that the real (inflation-adjusted) GDP will contract by 11 percent in the second quarter of 2020, which is equivalent to a decline of 38 percent at an annual rate. Furthermore, the number of people employed in the second quarter of 2020 will be almost 26 million lower than the number in the fourth quarter of 2019. The CBO also considers the effects of recent legislation, noting that “greater federal spending and lower revenues will cause real GDP and employment to be higher over the next few years than they would be otherwise.” However, in CBO’s assessment, “as long as some degree of social distancing remains in place, the economic boost that might be expected from recent legislation will be smaller than it would be during a period of economic weakness without social distancing.”
Late on Friday May 15, 2020, the most recent round of COVID-19 funding legislation, H.R. 6800, The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act), passed the House by a mostly partisan vote of 208-199. The bill, which was introduced in the House earlier this week on May 12, 2020, includes approximately $3 trillion in relief for state and local governments, individuals, and the healthcare system.
The next major round of COVID-19 legislation, H.R. 6800, The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act), was introduced in the house today, May 12, 2020. The package includes approximately $3 trillion in relief for state and local governments, individuals, and the healthcare system.
According to the Democratic staff of the House Committee on Appropriations summary , the bill includes, just in its funding for governments and financial services:
State Fiscal Relief – $500 billion in funding to assist state governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Local Fiscal Relief – $375 billion in funding to assist local governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Tribal Fiscal Relief – $20 billion in funding to assist Tribal governments with the fiscal impacts from the public health emergency caused by the coronavirus.
Fiscal Relief for Territories – $20 billion in funding to assist governments of the Territories with the fiscal impacts from the public health emergency caused by the coronavirus.
CARES Act Coronavirus Relief Fund Repayment to DC – Provides an additional $755 million for the District of Columbia to assist with the fiscal impacts from the public health emergency caused by the coronavirus
Treasury Inspector Generals – $35 million for the Treasury Inspector General for oversight of Coronavirus Fiscal Relief Fund payments to state and local governments, and $2.5 million for the Treasury Inspector General for Tax Administration for oversight of IRS payments.
Community Development Financial Institutions (CDFI) – $1 billion for economic support and recovery in distressed communities by providing financial and technical assistance to CDFIs.
Tax Credit Implementation – $599 million for implementation of additional payments to individuals.
Assistance to Homeowners–$75 billion to states, territories, and tribes to address the ongoing needs of homeowners struggling to afford their housing due directly or indirectly to the impacts of the pandemic by providing direct assistance with mortgage payments, property taxes, property insurance, utilities, and other housing related costs.
Elections – $3.6 billion for grants to States for contingency planning, preparation, and resilience of elections for Federal office.
Broadband – $1.5 billion to close the homework gap by providing funding for Wi-Fi hotspots and connected devices for students and library patrons, and $4 billion for emergency home connectivity needs.
Assisting Small Businesses – $10 billion in grants to small businesses that have suffered financial losses as a result of the coronavirus outbreak. Office of Personnel Management Inspector General Office (OPM IG) – $1 million for the OPM IG to combat healthcare fraud associated with COVID-19.
General Services Administration Technology Modernization Fund – $1 billion in funding for technology-related modernization activities to prevent, prepare for, and respond to coronavirus.
Postal Service – $25 billion for revenue forgone due to the coronavirus pandemic, plus language providing additional protections to Postal workers. An additional $15 million is provided for the Postal Service Inspector General for oversight of this funding.
The Small Business Administration released a statement Sunday providing details on Round 2 of the Paycheck Protection Program (the loan/grant program for small businesses initially enacted in the CARES Act and then refunded through supplemental legislation, H.R. 266, a few weeks later). The joint statement from the SBA and Secretary of the Treasury Steven Mnuchin noted that in this second round of loans which began on April 27, 2020, over $175 billion has been disbursed through 2.2 million loans. The average loan size is now $79,000.
Responding to concerns that smaller lending institutions were closed out of the loan process in Round 1, the statement offers data on the lenders in this Round: “Nearly 500,000 of the loans were made by lenders with less than $1 billion in assets and non-banks. These lenders include Community Development Financial Institutions, Certified Development Companies, Microlenders, Farm Credit lending institutions, and FinTechs. Over 850,000 loans—about one third of the 2.2 million loans—were made by lenders with $10 billion of assets or less.”
Important questions remains, however, about exactly how these small businesses can ensure that the loans they are receiving through the Paycheck Protection Program qualify for loan forgiveness. These businesses and their advisors continue to await further guidance from the goverment. On Friday, the AICPA issued a statement urging immediate guidance on these time sensitive questions for businesseses.
On April 30, 2020, Christine Lagarde, President of the European Central Bank (ECB), announced new monetary policy measures in response to the economic crisis triggered by the COVID-19 pandemic. At an ECB press conference, Largarde first set the stage for further action, observing (at 8:30 minutes in): “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime. Measures to contain the spread of the coronavirus (COVID-19) have largely halted economic activity in all the countries of the euro area and across the globe.”
After reviewing prior ECB action, Lagarde outlined (at 10:30 minutes in) new ECB steps including new incentives for bank lending: “Specifically, we decided to reduce the interest rate on TLTRO III [targeted longer-term refinancing] operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations prevailing over the same period. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.” (See also Largarde’s written statement).
Estimates suggest that “[e]merging markets and developing countries have about $11 trillion in external debt and about $3.9 trillion in debt service due in 2020.” A Brookings Institution posting highlighting these numbers argued that the debt problem is not limited to a few countries: “One indication that the problem is widespread is that already 90 countries have approached the IMF to access emergency financing instruments. It seems clear that this is not just a low-income or an African country problem.” The posting advocates immediate, comprehensive and coordinated action. The major global financial players share similar concerns. At their April 15, 2020 virtual meeting, G20 Finance Ministers and Central Bank Governors agreed, among other actions, to suspend debt service for the poorest countries. The World Bank and IMF have announced their own relief actions. Others have advocated stronger relief measures including cancellation, not merely suspension of certain debt payments.
The Congressional Budget Office has released preliminary estimates of the budgetary impact of the CARES Act, reporting that: “On a preliminary basis, CBO and JCT estimate that the act will increase federal deficits by about $1.8 trillion over the 2020-2030 period.” The CBO estimate includes:
• “A $988 billion increase in mandatory outlays;
• A $446 billion decrease in revenues; and
• A $326 billion increase in discretionary outlays, stemming from
emergency supplemental appropriations.”
On Wednesday April 15, 2020, U.S. Treasury Secretary Mnuchin and SBA Administrator Carranza announced that the Payroll Protection Program, introduced by the CARES Act has exhausted its $349 billion appropriation in fewer than 14 days, noting that “[b]y law, the SBA will not be able to issue new loan approvals once the programs experience a lapse in appropriations . . . .[and] urg[ing] Congress to appropriate additional funds for the Paycheck Protection Program . . . at which point we will once again be able to process loan applications, issue loan numbers, and protect millions more paychecks.”
The OECD has released a report tracking and reviewing countries’ tax and fiscal responses to the COVID-19 crisis. In this April 15, 2020 report, the OECD makes a series of observations and recommendations for the future, noting that “some are already suggesting the need for a new kind of ‘Marshal Plan’ to support the poorest countries.”
An updated version of the Working Paper, Regulating in Pandemic: Evaluating Economic and Financial Policy Responses to the Coronavirus Crisis by Hiba Hafiz, Shu-Yi Oei, Diane M. Ring, and Natalya Shnitser has been posted. The Working Paper is revised and updated to incorporate the CARES Act (H.R. 748) as well as recent action by the Federal Reserve, the Department of Labor, and other agencies.
Release of the minutes of the Federal Reserve’s March 15, 2020 meeting provides insight into the Fed’s perspective on the financial markets in light of the coronavirus impact U.S. and global markets. In addition to the rate cut, the Fed has pursued other measures intended to support the economy.