Biden’s $4.5 trillion spending plan faces deficit test

US President Joe Biden. (AP)
US President Joe Biden. (AP)


  • To avoid more red ink, the president has to unite Democrats behind his infrastructure and social plans and make sure tax increases aren’t repealed

President Biden’s $1.9 trillion Covid-19 relief package was financed entirely with borrowed money. Now, he is proposing to spend another roughly $4.5 trillion on infrastructure and social programs—without adding to the red ink.

“We can do it without increasing deficits," Mr. Biden said in a joint address to Congress Wednesday night, detailing a series of tax increases on the wealthy and corporations to pay for programs ranging from building charging stations for electric cars to subsidizing child care.

Mr. Biden’s ability to achieve that goal depends on a range of political and economic variables, some beyond his control. Among them: Whether moderate Democrats will go along with his proposed tax increases, and whether those increases will stay in place long enough to cover all of the extra costs.

Taken together, the proposals would add roughly $1.3 trillion to government deficits over the next 10 years, according to estimates by analysts at the Committee for a Responsible Federal Budget and Cornerstone Macro Research. They say the shortfalls would eventually be made up in the following years as tax increases continue and some of the spending winds down. Over time, they add, the national debt— which represents decades of accumulated budget deficits—may begin to decline as a share of economic output.

“I think it is clear that the framework for these proposals is to spend early, create a lot of investments that they think are going to have perpetual returns to the economy, and reduce the very long-term debt," said Marc Goldwein, senior vice president at the nonpartisan CRFB, based in Washington.

But Mr. Goldwein said relying on revenue more than 10 years in the future is risky. When Democrats passed the Affordable Care Act in 2010, they included provisions to raise revenues that have since been repealed.

Federal deficits, which were historically high and rising before the pandemic, have soared since March 2020 as Congress enacted several spending measures to combat the virus and cushion the U.S. economy from a recession, and as widespread business closures and layoffs weighed on tax revenue.

That drove U.S. debt held by the public from $17.4 trillion before the pandemic hit to $21.6 trillion when Mr. Biden took office, or roughly 100% of economic output—putting the U.S. in a league with highly indebted countries such as Japan. Some economists have warned that deficit-fueled spending could drive up interest rates and boost inflation, though that hasn’t happened in the U.S. or Japan in recent decades.

Republicans have pointed to the rise in government debt as a reason for spending restraint, and they warn that tax increases could hurt the economy by discouraging private investment. Sen. Tim Scott (R., S.C.), who delivered the GOP response to Mr. Biden’s congressional address on Wednesday, called his plans “a liberal wish list of big government waste."

Some Democrats have noted that the $1.5 trillion in GOP tax cuts enacted in 2017—which Republicans said would pay for themselves by spurring growth—contributed to wider budget deficits before the pandemic.

Recent years have seen a shift in the consensus among many economists over the dangers of deficits and debt, with some, including Mr. Biden’s own advisers, arguing that in an era when interest rates and inflation are projected to remain very low, the U.S. has the capacity to borrow more than previously thought prudent.

Mr. Biden embraced those arguments when he called for a $1.9 trillion, deficit-financed Covid-19 relief package, saying it was worth borrowing to propel the U.S. recovery and avoid long-term damage to the economy.

The relief package enacted in March, known as the American Rescue Plan, is expected to increase the national debt as a share of the economy to 108% for the 2021 fiscal year, from 102% before it was enacted, according to the CRFB.

Now, Mr. Biden has proposed two more packages—one focused on infrastructure and the other on families—that he says will lift growth over the long run with new spending on roads, bridges, research and development, clean energy, affordable child care and paid family leave, among other programs.

To pay for these plans, he wants to raise the corporate tax rate to 28% from 21%, increase the top capital-gains rate to 43.4% from 23.8%, and tax gains on assets as if they were sold when someone dies—proposals that would generate enough revenue over the next 15 years to offset the spending increases and expanded tax credits, the White House says.

Altogether, the two new packages call for about $4.5 trillion in new spending and $3.2 trillion in revenues over the next 10 years. The revenue gap, about $1.3 trillion, would be covered by higher taxes over the following five years, the White House says.

The CRFB estimates that Mr. Biden’s $2.3 trillion infrastructure proposal, dubbed the American Jobs Plan, would increase deficits by about $900 billion over 10 years, boosting the debt to 116% of gross domestic product by 2031.

After that, the plan would begin to shrink deficits, and debt would grow to 146% of GDP by 2041, or less than the 149% currently projected by the Congressional Budget Office.

For this to occur, however, Mr. Goldwein said policy makers would have to allow temporary spending programs such as an expanded child tax credit to expire as scheduled and make sure permanent tax increases remain in place—factors that depend on which party controls Congress and the White House.

The CRFB estimate is in line with an analysis from the Penn Wharton Budget Model, which found that Mr. Biden’s infrastructure plan would increase the debt over 10 years but reduce it substantially by 2050 compared with current CBO projections.

While the higher taxes help the fiscal outlook, Penn Wharton found they would ultimately reduce economic growth by discouraging business investment.

Finally, the American Families Plan, which includes universal preschool, two years of free community college and a national paid parental leave program, calls for $1.8 trillion in new spending and $1.5 trillion in tax increases over the next 10 years.

Mr. Biden’s spending and tax proposals in the infrastructure and families packages, taken together, appear to pay for themselves over 15 years, but uncertainties remain, said Donald Schneider, an analyst with Cornerstone Macro Research and a former GOP congressional aide.

For example, the administration estimates that its proposal to boost funding for the Internal Revenue Service by $80 billion over the next decade to increase tax enforcement would generate about $700 billion in additional net revenue over the period, more than other estimates have suggested, he said.

It’s also an open question whether Mr. Biden can win enough support in Congress to advance all his plans. With Republicans opposed to new large spending programs and tax increases, the president will need the support of nearly every Democrat.

Some moderate Democrats, including Sen. Joe Manchin of West Virginia, have expressed reservations about his tax increases. If Democrats don’t get behind all of his tax proposals, Mr. Biden may be forced to accept some deficit increases or scale back his spending plans, a move that would draw objections from progressives.

This story has been published from a wire agency feed without modifications to the text.

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