“Today’s Joint Fiscal Statement provides further evidence of our historic economic recovery, driven by our immunization effort and the U.S. bailout. It also demonstrates President Biden’s commitment to strengthening our country’s fiscal health. “Said Treasury Secretary Janet L. Yellen in a statement. “The economic plan recently signed into law by President Biden will build on the economic gains of the past two years.”
Biden budget pivots on deficit issues while bolstering military and domestic programs
The new estimate — widely expected by budget analysts — could help set the stage for further battles on Capitol Hill over taxes and revenues. GOP leaders have suggested in recent days that if they have more power in Congress next year, they might be willing to take advantage of a government shutdown or breach of the federal borrowing limit to demand spending cuts. That could lead to renewed battles under the Obama administration, when lawmakers nearly sparked a global economic calamity by failing to repay America’s loan obligations.
While Biden is eager to tout the lower deficit, conservatives point out that it’s down from a year ago largely because of the end of the big spending programs he approved.
“It is woefully dishonest of the White House to take credit for reducing the deficit simply because temporary pandemic spending expired on schedule,” said Brian Riedl, senior fellow at the Manhattan Institute, a libertarian-leaning think tank and former chief economist for Sen. Rob Portman (R-Ohio). “Especially when they had helped to widen the deficit with the American bailout.”
Debates over the deficit will be further intensified by rising interest rates, which are driving up the cost of federal borrowing dramatically. The Federal Reserve has raised interest rates significantly as part of its fight against inflation, and it is expected to continue this campaign for the foreseeable future. That could add trillions to the cost of debt, said Marc Goldwein, senior vice president for policy at the Committee for a Responsible Federal Budget, a think tank that pushes for deficit reduction.
The Congressional Budget Office, Congress’s nonpartisan budget arbiter, said interest payments on debt alone could reach $1 trillion a year, about double their current amount, by 2030, and this figure does not take into account the latest rate hikes from the Fed. Every one-point increase in projected interest rates translates to $2.4 trillion in additional debt over a decade, Goldwein said.
“It increases the political cost of the worsening deficit,” Goldwein said. “The borrowings we take now and the borrowings we take in the years to come will bite into higher interest rate debt.”
However, the response to these rising costs risks dividing lawmakers in Washington.
White House officials have repeatedly criticized Republicans this week for wanting to change Social Security and Medicare. GOP officials denied plans to cut benefits, but said they wanted to ensure the long-term fiscal solvency of entitlement programs. Republican lawmakers are also debating whether to try to cut clean energy spending in Biden’s inflation-cutting bill to tackle climate change, according to Stephen Moore, a former economic adviser to President Donald Trump who is in touch with GOP leaders. Democrats would fiercely resist these measures, which many experts believe are necessary in the fight against climate change.
“What I said to congressional leaders is that the most important thing is to cut spending as much as possible,” Moore said. “The deadly new virus is an out-of-control expense. They must take a hatchet for the budget.
Biden has touted the Cut Inflation Act for cutting the deficit by nearly $2 trillion over two decades, according to the Committee for a Responsible Federal Budget. But deficit hawks criticized him for reversing what the Congressional Budget Office estimated at about $400 billion in student debt repayments.
Four takeaways from President Biden’s budget proposal
Still, some economists have warned of the economic danger of cutting government spending at the same time the central bank raises rates – two forces that are slowing growth.
“We have already had strong deficit reductions. If you make them even sharper at a time when the Fed is already contracting the economy, it’s going to be really damaging,” said Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank. “If you want to push the economy into a recession, pairing big rate hikes with big spending cuts pretty much guarantees it.”