Biden faces impossible budget math even with big tax hikes
Story by Zachary Halaschak
President Joe Biden‘s budget proposal, set for release this week, is unlikely to come close to balancing or presenting a viable path to stabilizing the debt despite his embrace of major tax hikes on high-income earners.
The White House is set Thursday to release the president’s budget, which is not legislation but rather a proposal for consideration by Congress, which controls the purse strings and outlines the administration’s priorities.
Although specific details about the numbers involved aren’t readily available, Biden said in his State of the Union address that the budget proposal will cut deficits by $2 trillion over the next 10 years.
The problem for Biden, and the country, is that the accumulated deficits over the next 10 years are estimated to total about $20 trillion, according to the Congressional Budget Office’s latest projections. The debt, meanwhile, which represents the accumulated annual deficits, is expected to rise to about 120% of annual gross domestic product.
Biden has promised not to cut Social Security and Medicare, two of the main drivers of increased spending and which account for more than a third of government spending.
He’s also pledged not to raise taxes on anyone making under $400,000 a year.
Those promises leave him with little space to address the long-term mismatch between spending and revenues.
Unlike congressional Republicans in past years, Biden is not likely to aim to balance the budget even on paper.
“The goal of balancing the budget over 10 years is unfortunately so far out of reach because our fiscal situation is so bad that perpetuating that as a goal just leaves us with unrealistic hopes and expectations,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a group that favors deficit reduction.
In preparing the rollout of the budget, the White House on Tuesday unveiled a plan to stave off the insolvency of the Medicare hospital insurance trust fund, which the program’s trustees project will be exhausted in 2028.
In addition to expanding drug pricing reforms, the Biden proposal would increase payroll taxes for those earning more than $400,000 to fund Medicare benefits. Specifically, it would raise the Medicare tax rate for taxpayers earning an annual income of more than $400,000 from 3.8% to 5%.
It’s not yet known how much the proposed tax hikes would raise, but it would likely be scored, on paper, on the order of hundreds of billions of dollars.
The plan would face strong resistance from Republicans, who control the House of Representatives and oppose tax hikes. Republicans also argue that tax hikes will not raise as much revenue as the White House contends because they will slow economic growth.
Even if Biden were to implement them, however, they would not go far in terms of improving the overall budget picture. The added funds would merely prevent Medicare beneficiaries from seeing massive cuts, as they are scheduled to under current law. The budget projections that show massive deficits over the next decade, though, assume that current law will be followed and Medicare benefits will be reduced — meaning that Biden’s tax revenues would only pay for the new Medicare spending, not for deficit reduction.
The budget proposal is likely to include many more tax hikes.
But, meanwhile, the background picture has gotten worse in some ways.
Interest rates have exploded over the past several months as a result of the Federal Reserve’s campaign to drive down inflation by hiking interest rates. The higher rates threaten to dramatically raise the cost of servicing the federal debt. Yields on benchmark 10-year Treasury securities have risen to about 4% — higher than the CBO projections that show massive deficits.
Years of ultralow interest rates, which saw the yields on 10-year Treasury securities falling well below 1% during the pandemic, had allowed the federal government to take on huge amounts of debt with fewer ramifications — something further complicates the mission to tighten the budget deficit.
MacGuineas said that, for years, many “recklessly” asserted that because interest rates were so low, the United States should borrow more.
“And we did borrow more and now we have a massively huge debt — we had a big debt before; we have an even bigger debt now — and of course, when interest rates go up, that means our interest payments are growing,” she said. “So what we have right now is even if we add no new borrowing, we will be spending over $10 trillion on interest payments over the next decades. That is cause for alarm.”
The task of just stabilizing the debt, a situation in which the budget isn’t balanced in the next decade but the debt isn’t rising, is a goal Republicans may embrace.
They have already trashed Biden’s budget before it was even released and are hoping to use the looming debt limit deadline as a bargaining chip to exact spending cuts and other concessions that would reduce the deficit.
“Biden’s budget does nothing to legitimately address lowering our debilitating national debt. At some point, the numbers will catch up to us — and that will be [a] very bad day for Americans,” Sen. Mike Braun (R-IN) tweeted.
Biden’s budget is set to be released Thursday and will surely be discussed against the backdrop of the debt ceiling fight. The U.S. hit its debt limit last month, and the Treasury Department began “extraordinary measures” to prevent default.
The measures essentially amount to shifting money around government accounts to pay incoming bills without issuing new debt. But those measures are set to dry up sometime this summer, meaning there needs to be a fix in the coming months.
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