President Biden’s FY 2024 budget promises to reduce future deficits by $2.8 trillion over the next 10 years. That’s a big number. It is not enough, however, to prevent the debt from climbing to a record 110 percent of GDP in 2033, up from 98 percent this year and more than twice its average over the past 50 years.
It is also not enough to prevent interest on the debt from doubling over the next 10 years and reaching a record high as a share of the economy by 2032. The record is 3.2 percent of GDP in 1991. It reaches 3.3 percent of GDP in 2032 in the proposed budget.
How can a deficit reduction plan of nearly $3 trillion still leave the debt and interest costs at record levels? The answer is simple. Deficit reduction is calculated from a baseline of projected deficits that assume no changes are made to current law. Baseline deficits in the president’s budget total $19.9 trillion over the next 10 years, meaning that even with $2.8 trillion of deficit reduction the federal government would still accumulate $17.1 trillion of new deficits, adding to the total debt.
To put it mildly, we are in a very deep hole and it could get even deeper than the Biden budget projects. For one thing, the budget is based on a set of economic projections that assume positive feedback from the enactment of the president’s policies. Compared to Congressional Budget Office (CBO) numbers, inflation-adjusted gross domestic product (GDP) in the president’s budget is higher in the out years while unemployment and 10-year interest rates are lower.
On the policy front, Biden’s budget assumes that the temporary tax cuts enacted in 2017 will expire as scheduled after 2025. This assumption provides a revenue boost beyond 2025 that makes the numbers look better on paper without having to confront the political consequences of telling people now that a big tax increase is baked into the numbers. If the tax cuts are extended without other offsets, revenues will be lower and deficits higher than projected.
Another assumption that improves the bottom line is to pencil in discretionary spending cuts (defense and non-defense appropriations) far off into the future. While the president is proposing to increase defense outlays in 2024 and 2025 relative to the baseline, his budget reduces defense outlays from the baseline in every subsequent year.
The pattern is similar in non-defense discretionary spending. The president proposes outlay increases over the baseline in 2024-2027 but cuts below the baseline in 2028-2033.
Together, defense and non-defense discretionary outlays exceed the baseline by $66 billion in the first five years of the president’s budget and cuts $377 billion from the baseline in the second five years. In other words, the budget assumes that future lawmakers will have the fortitude to make spending cuts that this president and this Congress refuse to make themselves.
To be clear, discretionary spending cuts will have to be a part of any serious deficit reduction plan. But the future cuts proposed in the president’s budget would have more credibility if they were phased in more quickly and if they were paired with a new set of legally enforceable spending caps.
The real problem with the president’s budget, however, is that it does so little to control mandatory spending, which grows on autopilot outside of the annual appropriations process. In the president’s budget, total mandatory spending actually exceeds the baseline by $2.5 trillion, swamping whatever discretionary spending savings that might occur and eating into the deficit reduction that would otherwise result from the $4.7 trillion proposed revenue increase.
The president’s heavy reliance on tax increases to reduce future deficits, even while increasing spending, obviously makes his budget “dead on arrival” with House Republicans. On the other hand, a deficit reduction plan based solely on spending cuts, as Republicans seem intent on proposing, would be equally dead on arrival at the White House.
Without some compromises that unquestionably will be politically difficult, deficits and debt will continue their relentless climb into uncharted territory.
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Both sides, however, need to be mindful of how big the problem has become. Using CBO’s interactive workbook, I calculated it would take a package of spending cuts and/or tax increases totaling about $7 trillion — more than twice what the president is proposing — just to maintain the debt-to-GDP ratio at today’s already high level through 2033. That goal does not seem plausible today, but a meaningful first step is needed.
In that regard, the president’s goal of reducing future deficits by roughly $3 trillion over 10 years is a good starting point for bipartisan negotiations. Now it’s time to see the Republicans’ budget.
