Joe Biden’s Budget Would Lead To “Record” National Debt
President Joe Biden presented his first budget proposal on May 28, 2021, seeking a whopping $6 trillion in federal spending for the 2022 fiscal year. The budget request, which would increase federal spending by nearly a quarter, reflects the administration’s ambitious plans to revive the economy, tackle climate change, and address social inequities. However, the budget’s heavy reliance on government borrowing is raising concerns about the rising national debt, which could harm future generations by slowing economic growth, reducing investment, and limiting the government’s capacity to respond to emergencies.
The budget proposal comes amid an exceptional economic landscape, as the pandemic has dealt a devastating blow to the US economy, causing a sharp decline in economic activity and employment. The administration’s response has been swift and comprehensive, including a series of relief measures such as the $1.9 trillion American Rescue Plan Act, which passed in March 2021. The plan provided significant support to households, businesses, and states and localities, boosting consumer spending and reducing the risk of a prolonged recession.
Yet, the country’s finances have taken a severe hit, with the federal budget deficit reaching $3.1 trillion in FY 2020, the highest level since World War II, and projected to reach $3.7 trillion in FY 2021. The pandemic-induced economic slump, combined with the massive government spending response, has pushed the national debt to an all-time high of $28.2 trillion as of May 2021, equivalent to 129% of GDP. The country’s debt-to-GDP ratio has risen sharply from 106% in FY 2019, reflecting the widening fiscal gap between spending and revenue.
While the Biden administration contends that the proposed budget aims to “build back better,” some economists warn that the budget’s expansionary fiscal policies could lead to a record level of national debt that could pose significant challenges to future generations. Here are some reasons why Biden’s budget would lead to a high national debt, and the potential implications for the economy.
Increased Spending
The Biden administration’s proposed budget includes substantial increases in spending across various sectors, including infrastructure, education, healthcare, climate change, and social programs. The package includes $2.3 trillion in infrastructure spending, aimed at rebuilding roads, bridges, and airports, expanding broadband access, and investing in clean energy and green jobs. The administration also proposed a $1.8 trillion investment in families and education, including universal pre-K, free community college, and child tax credits, among others. The healthcare sector would receive a boost of $400 billion, with a focus on expanding Medicaid coverage and reducing drug prices.
While the proposed spending aims to boost economic growth, job creation, and social equity, it also requires significant government borrowing, adding to the national debt. According to the Committee for a Responsible Federal Budget, the Biden administration’s proposals would increase the debt by $4.8 trillion over the next decade, with debt rising to 117% of GDP by 2031. The projected debt levels are higher than those forecasted by the Congressional Budget Office, which estimated debt at 107% of GDP by 2031 under current law.
Lower Tax Revenue
The Biden administration’s budget proposal includes various revenue-raising measures aimed at increasing tax revenue from high-income individuals and corporations. The plan includes raising the top marginal tax rate to 39.6%, taxing capital gains as ordinary income for those earning over $1 million, increasing the corporate tax rate to 28%, and enhancing IRS enforcement, among others. The administration estimates that these measures would generate up to $1.5 trillion in additional revenue over the next decade, helping to reduce the deficit.
However, some tax experts argue that the proposed measures may not be sufficient to cover the proposed spending and could even worsen the deficit in the short term. For instance, increasing the corporate tax rate could result in some firms relocating their operations overseas or reducing investments, leading to lower economic growth and job creation. Similarly, taxing capital gains as ordinary income may discourage some investors from realizing gains, reducing transaction volume and tax revenue. Furthermore, the proposed revenue may also face political obstacles, as Republicans have opposed tax hikes, and some Democrats may object to specific measures.
Higher Interest Payments
One significant consequence of the rising national debt is the increase in interest payments the government must make to service its debt. As the debt grows, so does the interest burden, which reduces the government’s capacity to fund other programs or respond to emergencies. According to the Congressional Budget Office, interest payments are projected to reach $928 billion in FY 2029, equivalent to 3% of GDP, and rise to $1.6 trillion, or 3.5% of GDP, by 2050.
Furthermore, the interest rate sensitivity of the national debt heightens the risk of a debt crisis if interest rates rise sharply, as they did in the 1970s and early 1980s. The average interest rate on the federal debt held by the public has declined steadily since the 1980s, from over 9% in the early 1980s to 1.6% in 2020, reflecting the decline in inflation and interest rates in recent decades. However, if interest rates rise abruptly, as some experts predict, the government’s interest payments could increase sharply, amplifying the debt burden and reducing fiscal flexibility.
Reduced Investment and Economic Growth
Another concern with rising national debt is the potential impact on economic growth and investment. As the government borrows more, it absorbs a larger share of savings that could otherwise be deployed for private investment or other purposes. This “crowding out” effect reduces the available funds for private investment, leading to lower productivity, innovation, and income growth. Furthermore, the rising debt may reduce investor confidence in the long-term stability of the government’s finances or lead to a downgrade in the government’s credit rating, raising borrowing costs and hampering investment.
Moreover, the debt could limit the government’s capacity to respond to emergencies, such as natural disasters or economic shocks, by constraining fiscal resources. In the current pandemic, the government has relied heavily on fiscal stimulus measures, such as unemployment insurance, small business loans, and direct payments, to support households and businesses, mitigate the recession, and avoid a depression. However, if the national debt continues to rise, the government’s ability to provide such support in the future may be limited, reducing the resilience of the economy and worsening the social impact of crises.
Conclusion
President Biden’s budget proposal seeks to address some of the most pressing challenges facing the US economy, society, and environment. The proposed spending on infrastructure, education, healthcare, and social programs could boost economic growth, job creation, and social equity, which would be welcome developments. However, the budget’s reliance on government borrowing raises concerns about the potential impact on the national debt, interest payments, investor confidence, private investment, and future generations’ well-being.
While debt is not inherently bad, as debts enable investments and consumption beyond current income levels, excessive debt can create significant economic risks and social costs. Biden’s budget proposals would further increase the already record-high national debt, potentially making it more challenging for future generations to finance their priorities, respond to emergencies, and achieve long-term prosperity. As such, policymakers must consider the trade-offs between short-term spending and long-term fiscal stability and adopt measures that promote sustainable economic growth, reduce the deficit, and contain the national debt.