September 21, 2025

Fiscal Consequences of the US War on COVID

GHGeorge HallBrandeis University TSThomas J. SargentBuffalo State University

Key Points

Persistently lower tax collections compared to GDP could lead to higher inflation in the US economy.
Prior to 2000, wartime spending led to stable rises in both expenditure and tax collection ratios relative to GDP.
Current trends show that the government expenditure surge during the War on COVID has not been matched by rising tax collections.
Prolonged discrepancies in fiscal ratios may increase nominal interest rates on US government bonds over time.

Abstract

ABSTRACT After 2000, ratios of tax collections to GDP and government expenditures to GDP have departed from 19th and 20th century US patterns. Before 2000, wartime government expenditure/GDP surges were accompanied by permanent rises in expenditure/GDP and tax collection/GDP ratios. Part of the War on COVID expenditure/GDP surge has persisted, but so far tax collections have not risen relative to GDP. If that discrepancy persists, the consolidated federal government budget constraint portends permanently higher US inflation and higher nominal interest rates on US government interest‐bearing bonds.

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