ICAEW.com works better with JavaScript enabled.

Quarterly Issue 2

The US’s financial response to COVID-19

Author: ICAEW Insights

Published: 17 Jul 2020

US skyline

With the IMF projecting average debt-to-GDP ratios exceeding 120% in 2021, we examine the measures taken by five countries to the economic impacts of the coronavirus pandemic. Here, we explore the US’s response.

The US Federal Reserve has been overseeing recovery efforts, and central to the plan was the decision to earmark $850bn for loans to companies.

However, according to a poll by the US Chamber of Commerce, more than 40% of the US’s 30 million small businesses could close permanently in the run-up to Christmas because of the coronavirus pandemic.

But there may be some silver lining. Weeks before the pandemic hit, Congress passed a new law simplifying the bankruptcy process for smaller businesses, making it easier to navigate out of debt and stay in business.

The federal government acted quickly to ramp up its purchase of state debt, pledging to buy upwards of $500bn in bonds in the coming months.

The big fear is the enormous numbers joining the jobless rolls – some 33.5 million in seven weeks. What, then, will the US do to put young people back to work once lockdown begins to ease? 

One solution would be to follow through on the long-held promise to begin the significant infrastructure investment the country needs, most likely paid for by more borrowing.

Looking ahead

The Congressional Budget Office (CBO) has projected that without policy changes, the federal debt-to-GDP ratio could rise from a pre-crisis level of 104% to around 108% by the end of the 2021 fiscal year. That rise would take the ratio to its highest ever level.

The impact on unemployment will be even more marked. The CBO says it expects the unemployment rate to average 15% in the second and third quarters of 2020, higher than at any point since the early 1930s. 

Indeed, by the third quarter of 2020, about 28 million fewer people will be employed and about nine million fewer people will be in the labour force than the CBO predicted in January.