Biden helps show shrinking deficit as GOP prepares for spending battles

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The Biden administration said Friday that the federal deficit halved from a year earlier as Washington prepares for new battles over taxes and spending with rising interest rates and Republicans expected to take back at least one branch of Congress in the midterm elections .

In a statement, the Treasury Department said the annual deficit fell from $2.8 trillion in 2021 to about $1.4 trillion in 2022 — a drop primarily driven by the expiration of trillions in emergency spending during the pandemic. The gap between revenue and spending also narrowed in part because of stronger-than-expected tax revenues as a booming U.S. economy and big corporate profits helped bring additional funds to federal coffers.

“Today’s joint budget statement provides further evidence of our historic economic recovery, driven by our vaccination efforts and the American rescue plan. It also demonstrates President Biden’s commitment to strengthening our nation’s fiscal health,” Treasury Secretary Janet L. Yellen said in a statement. “President Biden’s newly adopted economic plan will build on the economic gains of the past two years.”

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The new estimate — widely expected by budget analysts — could help set the stage for fresh battles on Capitol Hill over taxes and revenue. GOP leaders have suggested in recent days that if they have more power in Congress next year, they may be willing to use a government shutdown or breach of the federal borrowing limit to demand cuts. That could lead to a repeat of the struggles of the Obama administration, when lawmakers came close to triggering a worldwide financial disaster by defaulting on US debt obligations.

While Biden is eager to tout the declining deficit, conservatives point out that it was down from last year, in large part due to the end of major spending programs he approved.

“It’s terribly 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 since they had helped increase the deficit with the US bailout.”

Debates about the deficit will be further intensified by rising interest rates, which are dramatically pushing up the cost of federal borrowing. The Federal Reserve has raised interest rates significantly as part of its fight against inflation, and it is expected to continue that campaign for the foreseeable future. That could add trillions to the cost of raising debt, said Marc Goldwein, senior vice president for policy at the Committee for a Responsible Federal Budget, a think tank that pushes for lower deficits.

The Congressional Budget Office, Congress’s nonpartisan budget scorer, has said that interest payments on the debt alone could reach $1 trillion a year — about double their current amount — by 2030, and that figure doesn’t take into account the Fed’s recent rate hikes. Each one-point increase in expected interest rates translates into $2.4 trillion in additional debt over a decade, Goldwein said.

“This increases the political cost of making the deficit worse,” Goldwein said. “The loans we’re making now and the loans we’re making in the coming years will bite into higher interest debt.”

The response to these rising costs, however, is likely to splinter lawmakers in Washington.

White House officials have repeatedly criticized Republicans this week for wanting to change Social Security and Medicare. GOP officials have denied they are aiming to cut benefits, but said they want to ensure the long-term fiscal solvency of the entitlement programs. Republican lawmakers are also considering whether to try to cut clean energy spending in Biden’s signature inflation-reduction law to fight climate change, according to Stephen Moore, a former economic adviser to President Donald Trump who is in contact with GOP leaders. Democrats will fiercely oppose these measures, which many experts believe are necessary in the fight against climate change.

“What I’ve told congressional leaders is that the most important thing is to cut spending as much as possible,” Moore said. “The new deadly virus is out of control spending. They have to take an ax to the budget.”

Biden has touted the Inflation Reduction Act to lower the deficit by nearly $2 trillion over two decades, according to the Committee for a Responsible Federal Budget. But deficit hawks have criticized him for canceling what the Congressional Budget Office has estimated is about $400 billion in student debt payments.

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Still, some economists have warned of the economic danger of cutting government spending at the same time as the central bank raises interest rates — two forces that slow growth.

“We’ve already had sharp cuts to the deficit. If you make them even sharper at a time when the Fed is already contracting the economy, that’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 throw the economy into a recession, the coupling of big interest rate hikes with sharp spending cuts is pretty much a guarantee of that.”

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