By Alan J. Auerbach, William G. Gale
The COVID-19 pandemic and the associated policy responses generated large federal budget deficits in recent years. The good news is that these factors are expected to have mainly short-term effects on the federal budget. The bad news is that – as the pandemic recedes, the associated policies expire, and the economy transitions to a more normal state of affairs – the government inherits a much larger national debt than was projected before the pandemic, and other fiscal parameters return more or less to their pre-COVID trajectories, which already were and still are unsustainable and will eventually require federal action. How quickly those actions are needed will depend on many factors, including the path of interest rates.
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