Government spending increased $2 trillion in 2020, but GDP fell by nearly a trillion

How did GDP change in 2020?

Gross domestic product (GDP), one of the most cited numbers in economic reporting, is used to estimate the size of the US economy. GDP is calculated as the value of goods and services produced in the United States, and its growth rate is often the focus of presidential policy agendas.

Inflation-adjusted GDP has grown 2.1% on average over the past 20 years, but it fell from $21.7 trillion in 2019 to $20.9 trillion in 2020. This was equivalent to a 3.5% GDP decrease, the greatest since 1946.

[For more on the economy in 2020, see the 2020 State of the Union: Economy report]

How did the stimulus affect federal government spending in 2020?

The federal government spent $6.6 trillion in fiscal year 2020, which began on October 1, 2019 and ended on September 30, 2020. This was over $2 trillion more than what it spent in fiscal year 2019. The pandemic spurred most of the spending increase, including more than $500 billion to support businesses and over $600 billion in cash aid to individuals via unemployment insurance, stimulus checks, and more.

The nation spent 91% more than it collected in revenue as a result of increased spending and relatively flat revenues, creating a $3.1 trillion deficit. At the same time, the federal debt grew to $26.9 trillion, or 129% of GDP.

[For more on the federal budget in 2020, see the 2020 State of the Union: Federal Budget report]

How does government spending relate to GDP?

Government spending is central to GDP. GDP has four major components: consumption, private investment, net exports (exports minus imports), and government consumption expenditures and investment.

GDP = Consumption + Investment + Net exports + Government consumption/investment

Consumption of goods and services make up over two-thirds of GDP, and private investment and government spending comprise the rest roughly equally. Most of the 2020 GDP decline was due to decreases in household spending on services such as restaurants, recreation, and health care. Consumption expenditures fell by more than $570 billion from 2019 to 2020.

If government spending increased by $2 trillion and consumption only decreased by $570 billion, why did GDP decrease by $760 billion? That’s largely because GDP excludes the direct transfer payments like Social Security, unemployment insurance, and stimulus checks that made up a large portion of the increase in government spending. These expenditures are excluded from GDP because they transfer money from one entity to another and are not final payments for goods and services, which is what GDP measures. However, if people spend the money from government and spend it on goods and services, then it will show up in GDP through consumption.

Governments typically transfer large payments to people in an economic stimulus in hope that people will spend their extra cash on consumption to boost the economy. However, for several reasons, including limited outlets for spending, Americans saved more of their disposable income in 2020 than any year since 1945.

While this uptick in saving is true when looking at all Americans’ income and spending combined, government data does not yet provide insight into how saving has differed for people of different income groups. It’s unclear who is saving: more affluent Americans, less affluent Americans, or both.

This information is critical for policymakers to know and understand as they craft the next stimulus to determine which groups are in greatest need of support. To make informed decisions in shaping the nation’s recovery from coronavirus, the government must publish timely data on how income and savings have changed during the pandemic by income groups.

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