The Biden administration’s first budget will be clarifying when it is finally unveiled. Rarely has so much consequential tax and spending policy been up for grabs, with the potential for large swings in fiscal outcomes. While some uncertainty at the beginning of a presidency is normal, the range of possible paths forward is unusually wide as the country emerges from a historically difficult crisis. The forthcoming budget will answer many important questions if it is presented honestly.
While federal law requires the president to deliver a fiscal blueprint to Congress by the first Monday in February, it is normal in the first year of a presidency for the administration to delay the submission. President Obama sent his first budget to Congress in May 2009.
In the past two decades, presidents’ budgets have become less relevant. They regularly contain proposals that neither the administration nor Congress take seriously. That was certainly the case in the Trump years. The former president cared little about deficits and debt, and it showed. He was known to criticize proposals that were in his own plan if he discovered Democrats in Congress were supporting them too.
Presidents’ budgets have not always been dead on arrival. President Reagan’s 1981 plan set in motion a decade of tax-cutting and spending restraint. In 1993, President Clinton’s first budget led to the largest tax increase in many years, and eased the financial pressure on federal programs during the remainder of his two-terms in office.
Budgets can be as important for what they exclude as include. When a budget is put together properly, the numbers in the tables tell a story about priorities and trade-offs, even if the accompanying words are written to downplay controversies.
In the aftermath of the enactment of the latest COVID response bill, President Biden has several big decisions to make. How much additional spending will he seek, and for what? Will he advocate a net tax hike, and who will pay those taxes? Will he cut the defense budget, or impose price limits on prescription drugs? Will the net effect of his proposals increase annual deficits, or lower them?
There are now hints about what he might choose to do but not definitive answers. The administration is considering breaking up his initiatives into two or more legislative packages, perhaps to obscure their full fiscal implications. It would not be surprising if, when all of the various initiatives and offsets are considered, the Biden budget produced a net overall reduction in the ten-year deficit, but it is possible it could have the opposite effect. One important reason to require a president to submit a full budget is to clarify such matters.
Among Democrats, there is palpable excitement at coming possibilities. They see an opportunity for an expansion in federal activity similar to what occurred in the 1930s and 1960s. Their priority list is long, and expanding, with new infrastructure spending, green energy, health coverage, and permanent income subsidies at the top of it.
They are less clear on how, or if, they will pay for what they are advocating. A vocal faction wants to abandon fiscal restraint. They contend much of their agenda is akin to an investment that will produce an economic return, and thus should be financed from borrowing. They also believe accumulating more federal debt is mostly harmless, even when used to pay for consumption.
They have a weak case. Federal infrastructure spending has the potential for enhancing growth, but only if it is well-targeted and does not displace what would have occurred anyway. New subsidies for health coverage and stepped up income transfers enhance consumption, but there is scant evidence they will spur growth.
Meanwhile, the federal government moves ever closer to a debt crisis. In February, the Congressional Budget Office (CBO) projected the ten-year deficit would equal $12.6 trillion. With $1.9 trillion in new spending now authorized in the latest COVID response law, the deficit will climb to $14.5 trillion, and federal debt will exceed 110 percent of GDP in 2031.
The president and his aides are signaling they may offset their planned spending with tax hikes, cuts in defense, and price controls on prescription drugs. After spending $6 trillion on COVID relief legislation, even some Democrats in Congress are tiring of piling on more debt.
Republicans should applaud the president for suggesting offsets, even if they disagree with what he proposes. Their leverage will increase substantially when the specifics of the tax hikes and spending cuts become known. Targeting mainly the rich and drug companies will not drain the proposals of all contention; they will be difficult to pass in an evenly divided Congress.
The usefulness of a president’s budget depends in large part on the integrity with which it is drafted. Every administration is tempted to obscure the implications of its choices with optimistic assumptions and gimmicks. Some presidents have gone farther than others to divert attention away from unpleasant realities.
There is no reason to believe the Biden administration will not play it (relatively) straight. If that assumption is right, the coming submission of the new president’s first budget will be a useful guide to the pros and cons of what he is advocating.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.