In his budget proposal for FY 2024, President Biden pledges to cut future deficits by $2.8 trillion over the following ten years. That’s a substantial sum. Yet, it won’t be enough to stop the debt from increasing to a record 110 percent of GDP in 2033, up from 98 percent this year and more than twice the average over the previous 50 years.
However, it won’t stop interest on the debt from rising to a record-high percentage of the economy by 2032 after doubling over the following ten years. The previous high was 3.2% of GDP in 1991. In the budget that has been presented, it will amount to 3.3% of GDP in 2032.
How can a nearly $3 trillion deficit reduction plan still leave the debt and interest rates at historic highs? There is an easy solution. Deficit reduction is computed using expected deficits as a starting point, assuming no changes are made to the existing law. The president’s budget calls for $19.9 trillion in baseline deficits over the next ten years, which means that even with $2.8 trillion in deficit reduction, the federal government would still run up $17.1 trillion in additional deficits, increasing the nation’s debt.
We are, to put it mildly, in a pretty deep hole, and it might go worse still than the Biden budget anticipates. One such factor is that the budget is based on a series of economic projections that presumptively reflect favorable effects from the implementation of the president’s policies. Inflation-adjusted gross domestic product (GDP), along with unemployment and 10-year interest rates, are higher in the president’s budget’s out years compared to CBO figures.
In terms of policy, Biden’s budget anticipates that the 2017 temporary tax cuts will end as planned in 2025. This supposition generates additional money after 2025, improving the statistics on paper without having to deal with the political repercussions of informing the public now that a significant tax increase is built into the calculations. Without further offsets, extending the tax cuts will result in fewer revenues and bigger than anticipated deficits.
Making long-term projections for discretionary spending cutbacks (to both defense and non-defense appropriations) also helps the bottom line. While the president’s budget cuts defense spending from the baseline in each year after 2024 and 2025, it increases defense spending in 2024 and 2025 relative to the baseline.
The pattern is similar in non-defense discretionary spending. In 2024–2027, the president suggests spending increases above the baseline, but in 2028–2033, he suggests cuts below the baseline.
In the first five years of the president’s budget, discretionary spending on military and non-defense as a whole exceeds the baseline by $66 billion while falling $377 billion short in the next five years. In other words, the budget makes the bold assumption that future representatives will have the courage to rein down spending when the current president and Congress are unwilling to do so.
To be clear, any credible proposal for reducing the deficit must include cuts to discretionary spending. Yet if the president’s budget’s future cutbacks were implemented more swiftly and were coupled with new, legally binding expenditure restrictions, they would appear more credible.
Yet the main issue with the president’s budget is how little it does to rein in mandatory expenditure, which increases without any human intervention outside of the annual appropriations process. The overall obligatory spending in the president’s budget is actually $2.5 trillion higher than the baseline, swamping any potential reductions in discretionary spending and reducing the deficit that would otherwise be achieved by the $4.7 trillion proposed revenue increase.
The president’s budget is evidently “dead on arrival” with House Republicans because of his significant dependence on tax increases to alleviate future deficits while simultaneously raising spending. Yet, a strategy for reducing the deficit that relied only on expenditure cuts, as Republicans seem keen on doing, would also fail as soon as it reached the White House.
Deficits and debt will continue to rise relentlessly into unknown territory without some compromises, which will undoubtedly be politically challenging.
But it’s important for both parties to recognize how serious the issue has grown. Using the CBO’s interactive workbook, I determined that, in order to keep the debt-to-GDP ratio at its current, high level until 2033, a package of spending reductions and/or tax increases totaling nearly $7 trillion would be required—more than twice what the president is recommending. Although that objective now does not seem feasible, a significant first step is required.
In that regard, the president’s target of cutting future deficits by approximately $3 trillion over ten years is a solid place to start for negotiations between the two major parties. The budget for the Republicans is now ready for viewing.