How does the Paycheck Protection Program impact the national income and product accounts (NIPAs)?

The Paycheck Protection Program (PPP) provides forgivable loans to help small businesses and nonprofit institutions impacted by the COVID-19 pandemic and economic downturn make payroll and cover other expenses. The program was authorized initially by the Coronavirus Aid, Relief and Economic Security Act (CARES) of 2020, modified by subsequent legislation, and reauthorized by the Coronavirus Response and Relief Supplemental Appropriations Act of 2021.¹

The loans are administered by banks and other lending institutions. The federal government pays the lending institutions fees for these services. In the NIPAs, the fees are recorded as nondefense consumption based on data from the Small Business Administration on loan approvals and the program's fee structure.

Under the CARES Act, small businesses, including the self-employed, may take out loans up to $10 million that can be used for up to six months of average monthly payroll costs from the last year.  Up to 40 percent of the loan can be used for non-payroll expenses, such as most mortgage interest, rent, and utility costs. All loans are for five years and have a 1 percent fixed interest rate. All payments are deferred for 6 months; however, interest will accrue during the deferral period.

Loans may be forgiven if the loan is used for payroll, interest payments on mortgages, rent, and utilities. However, the amount that is forgiven would be reduced proportionally by non-exempted reductions in the number of retained employees compared to the prior year or a 25 percent or greater reduction in employee compensation.

Under the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, forgivable loans to first- and second-time small business borrowers are available through the PPP. Eligibility was expanded for nonprofits and dedicated funds are available to very small businesses and community-based lenders. Second-time loans are limited to businesses with fewer than 300 employees that experienced at least a 25 percent drop in gross receipts in a 2020 quarter compared to the same quarter in 2019. The maximum loan size for second-time borrowers is $2 million.

The American Rescue Plan Act of 2021 provided an additional $7.25 billion in funding with less stringent access standards for nonprofit entities, digital media companies, sole proprietors, independent contractors, and self-employed individuals.

PPP loans can be used to pay qualifying expenses, which have been expanded to include expenses such as covered property damage, supplier costs, or worker protection expenditures in addition to employee wages or operating expenses such as rent and utilities. When used for qualifying expenses, PPP loans are eligible for forgiveness. Another modification from the original PPP is that borrowers may now choose the length of their covered period, from a minimum of at least eight weeks to a maximum of 24 weeks.  All loan payments are deferred for 10 months.

In the NIPAs, PPP loans to businesses that are forgiven are classified as a subsidy to the employers. Although administered as a "loan", the general intention is that these loans will be forgiven if the program's requirements are satisfied. Effectively the structure of the program is intended to ensure compliance with the terms of use for the funds. In the NIPAs, PPP loan subsidies to nonprofit institutions serving households are classified as a social benefit payment.

BEA's classification of monies flowing through this program as subsidies recognizes that these payments support keeping businesses afloat and retaining employees to maintain current production or to re-open more quickly when permitted. BEA's initial estimates of the subsidies, which assume a certain percentage of the loans will be forgiven, may be revised when the actual amount of loan forgiveness is determined by the Small Business Administration. Loans that are not forgiven will be treated as regular loans in the national accounts, which are classified as financial transactions and have no direct impacts on the NIPAs except for interest flows.

The loans are intended to cover expenses over the time period specified by the terms of the loan, so the estimates of subsidies for businesses and benefit payments for nonprofit institutions in the NIPAs are allocated over the same period. BEA prepares monthly estimates of loans using reports of loan approvals from the Small Business Administration. These monthly values are then adjusted to account for the time between loan approval and disbursement, and then are distributed over the period covered by the loan. The allocation between corporate business, non-corporate business, and nonprofit institutions is based on additional information from the Small Business Administration.

Subsidies are a subtraction in the calculation of GDI because of their implicit inclusion in operating surplus (proprietors' income and corporate profits), and conceptually have no net effect on GDI (NIPA table 1.10); government saving (NIPA table 3.1) is reduced because the subsidies and benefit payments to nonprofit institutions are part of government expenditures

For information about the estimates in the NIPAs, see "Effects of Selected Federal Pandemic Response Programs on Personal Income" and "Effects of Selected Federal Pandemic Response Programs on Federal Government Receipts, Expenditures, and Saving" at Federal Recovery Programs and BEA Statistics: COVID-19 and Recovery.

The following examples (in the chart below) illustrate the impact of the PPP on GDI for a business that attempts to maintain employment.  Example 1 shows a case where a business does not receive a subsidy.  Example 2 illustrates a case where a business receives a subsidy.  Period 1 represents a period of normal operations, while Period 2 shows the business as closed.

In both examples, one can see the decline in GDI between these two periods. However, the impact on GDI is the same in Period 2 -- regardless of whether there is a subsidy.

In effect, the subsidy in Period 2 transfers the cost of employment to the government and offsets the decline in net operating surplus. There is no change in compensation because only the source of funding has changed.

¹The Coronavirus Aid, Relief and Economic Security Act (CARES) of 2020 authorized $350 Billion, while the Paycheck Protection Program and Health Care Enhancement Act of 2020 authorized $310 Billion for loans through the Paycheck Protection Program. The Paycheck Protection Program Flexibility Act (PPPFA) modified several provisions of the program, including extending the time allotted to use PPP funds from eight to twenty-four weeks, reducing the amount of funds required to be used on payroll from 75 percent to 60 percent, and increasing the exemptions for reductions in head counts for the loan forgiveness requirements.  The program ended on August 8, 2020 after disbursing $525 billion in loans.  The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 authorized $284 billion for loans through a modified version of the PPP.