Reading Between the Lines of Biden's Budget
Although President Biden began his term more than four months ago, his first budget submission to Congress, released last Friday, is a less complete offering than is typical, and leaves many questions unanswered. That may be purposeful, to avoid criticism, but it also surfaces a nagging worry: that, on matters of budget process and fiscal discipline, this administration may not offer a clean break from its predecessor. That portends much trouble ahead.
The president’s budget spells out the major spending increase he seeks. All totaled, the budget proposes to plus up federal outlays by $5.0 trillion, or 7.8 percent, over a decade, relative to a current law baseline. Taxes would rise by $3.6 trillion, or 7.1 percent, over the same period.
Once upon a time, presidents were hesitant to widen deficits during expansions. No more. The Biden budget would increase federal borrowing by $1.4 trillion over ten years, even as the administration expects real GDP growth to accelerate in 2021and remain near 2 percent through 2031. The total deficit over the period 2022 to 2031 would be $14.5 trillion, and average 5.9 percent of GDP annually. During much of the postwar period, typical annual deficits were between 2 and 3 percent of GDP.
The high annual deficits projected for the next decade would push federal debt up from 100 percent of GDP in 2021 to 117 percent in 2031. The rapid deterioration in the government’s net financial position remains startling. Quite recently -- at the end of 2008 -- federal debt was equal to 39 percent of GDP.
Rising inflation is one of the risks of exceptionally loose fiscal policy. As federal debt mounts, the president’s budget projects a modest increase in debt service obligations, from 1.4 percent of GDP in 2021 to 2.7 percent in 2031. This forecast assumes today’s benign interest rate environment will persist indefinitely, with rates on 10-year Treasury notes going no higher than 2.8 percent annually.
The danger lies in recency bias. Because interest rates have been low for some time now, the expectation has taken hold that this is the new normal. The rise in price pressures now underway is a warning to those who would be complacent about the risks. Annual interest on 10-year notes of 4 or 5 percent, which was not unusual before 2008, would send federal debt service costs soaring.
The administration’s policy objectives are evident from the heavy focus on its infrastructure plan and social welfare expansions (dubbed the Ameriand Jobs and Families plans, respectively). There is substantial line-item detail about each in the budget, which will help inform the debate that is already well underway in Congress. Combined, these plans would cost $4.4 trillion over ten years, with the spending partially financed by $2.8 trillion in tax hikes.
Beyond these initiatives, the administration also wants a substantial increase in domestic appropriations, even as a downsizing is expected for defense accounts. Outyear appropriations projections are not entirely reliable because of the annual opportunity for revision, but they can signal expected priorties for the years ahead. The president and his aides are planning further expansions in domestic spending, partially offset with restraint on the military.
The absence of specific plans for some proposals is revealing too. As a candidate, Biden was a vigorous proponent of a new publicly-run insurance option in the Affordable Care Act (ACA) exchanges. The budget includes a brief and general description of the idea, and no details on how it would work or what it would mean for federal spending. Similary, in the budget document’s text, there are endorsements of lowering the age of eligibility for Medicare to 60 (from 65) and for controlling prescription drug prices, but no details on how they will be advanced in Congress, or what the budgetary effects would be from their enactment.
On these campaign pledges, the administration is going through the motions. The odds are simply too long in a closely-divided Congress to create any expectation that they might become law.
The administration’s budget document claims its plans will reduce deficits in the decade beginning in 2032, mainly because the tax hikes will build while the infrastructure spending levels off. Even if such projections are reliable (which is doubtful), the projected savings are trivial relative to the challenge. The Congressional Budget Office projects federal deficits will widen to 9 percent of GDP in 2040 and 13 percent in 2050, and federal debt will exceed 200 percent of GDP in three decades. The projected deficit reduction in the Biden budget is rougly 0.6 percent of GDP over the ten-year period 2032 to 2041.
The president wants 2021 to mark the beginning of a new era in governmental activism. It is too soon to tell if he will succeed, but there are reasons to be doubtful. The COVID-19 pandemic has been a historically traumatic event that might open up possibilities for an expanded government role in American life, but the president’s party holds far fewer seats in Congress than it did in 1933 and 1965. The most likely scenario is that the administration will accept a big but not norm breaking infrastructure and social welfare bill, paid for with whatever tax hikes all Democrats in Congress find acceptable. The initiative won’t be transformational, but it will be a victory for the president nonetheless.
What is not in the offing, as the president has now made clear, is a return to sensible caution about the nation’s deteriorating fiscal outlook. The new administration has internalized the view that, with interest rates low, there is ample room for further expansion of the government’s spending commitments and more borrowing. It is a perspective that is pleasing to many voters; it also has the potential to inflict substantial and lasting harm on the U.S. economy.
James C. Capretta is a Contributor at RealClearPolicy and holds the Milton Friedman Chair at the American Enterprise Institute.