President Joe Biden’s new budget isn’t going anywhere. Policy for the current fiscal year is in disarray, to say nothing of the one that starts next October — and things will probably get worse as elections approach. Still, the new blueprint lets voters see whether Biden has the ambition, at least, to put the budget on a more prudent course.
The answer is not really. Biden’s plan has some good ideas on new spending and how to pay for it. The president also deserves credit for acknowledging that ever-rising public debt isn’t sustainable and for saying he’ll do something about it. Trouble is, his numbers don’t add up.
The plan is right to raise taxes more than spending — enough to curb borrowing and stabilize the ratio of debt to gross domestic product at 106% by 2029. That’s much better than the current baseline, which shows debt rising from 99% of GDP this year to 117% by 2034, with more to follow.
Yet the budget’s forecasts optimistically assume strong and steady growth over the coming decade. A downturn would drive debt higher. Starting out with a ratio pinned at well more than 100% of GDP — the highest since just after World War II — leaves no space for emergency fiscal expansion. When the economy is at full employment and growing well, public debt should be falling.
The arithmetic also ignores two looming fiscal crunches. First, after 2025, many of the measures included in the Tax Cuts and Jobs Act of 2017 will expire. Biden’s plan relies on the revenue that would result despite promising (no details) to extend the law’s changes for people making less than $400,000 a year. In effect, that hides a shortfall of $1.4 trillion. Second, Social Security is heading for insolvency in 2033. The budget promises to prevent this, but doesn’t say how — another big fiscal hole.
The administration’s spending proposals are mostly sound. Wider access to early-childhood education and subsidized child care would cost $600 billion over 10 years — money well spent, so long as the programs are well-designed. Bigger Affordable Care Act subsidies, broader Medicaid coverage, more generous Pell grants and an expanded Child Tax Credit all make sense. Altogether, the budget calls for an additional $3 trillion in spending and tax cuts over a decade.
To pay for this and then some, the plan includes $6 trillion in new revenue and program savings. Again, it has good ideas, many long overdue. Medicare should save money by negotiating the prices of more drugs. Unrealized capital gains should be taxed at death, not erased by so-called step-up basis. Carried interest should be taxed like ordinary income. But smart reforms like this can’t do the heavy lifting. With households making less than $400,000 excluded, the biggest hauls come from taxing profits at 28% instead of 21% and from sharply higher taxes on the rich.
This strategy is questionable. Recent evidence suggests that former President Donald Trump’s corporate tax cuts spurred investment; over time, that means faster growth. And by international standards, the US personal tax code is already progressive. (Europe’s governments, having tested the limits of income taxes, rely heavily on broadly based consumption taxes to pay for their more expansive spending programs.) New taxes that fall heavily on capital formation and boost the rewards for tax avoidance are likely to hurt the economy and raise less money than the administration’s planners think.
Sure, the new budget could’ve been a lot worse. But responsible fiscal policy demands careful accounting, a falling debt ratio when the economy is strong and broadly based taxes that match the government’s spending ambitions. Maybe next time.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our most recent white papers.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
