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Biden’s budget sees low inflation, rising debt and slow economic growth

The New York Times
WashingtonWritten By: Alan Rappeport © 2021 The New York TimesUpdated: May 28, 2021, 11:21 PM IST

(File Photo) US President Joe Biden Photograph:(AFP)

Story highlights

The budget also underscores the Biden administration’s belief that the fiscal situation is manageable and that, given historically low interest rates, now is the time to make major investments

President Joe Biden’s $6 trillion budget proposal represents the largest increase in federal spending since World War II and offers the most detailed look to date at the White House’s economic priorities.

The administration is in negotiations with lawmakers over how to enact the next phases of its agenda, and many of the provisions in the budget will be met with resistance from Republicans. But the proposal offers a new view into the costs of the Biden administration’s infrastructure and jobs plans and the effect that this broad expansion of the social safety net would have on the economy over the next decade.

The budget also underscores the Biden administration’s belief that the fiscal situation is manageable and that, given historically low interest rates, now is the time to make major investments to combat climate change and reduce income inequality. White House officials see that spending as crucial to making the U.S. economy more competitive in the long run.

The proposal, which will be formally released Friday, will further fuel the political debate over whether the country can afford such ambitious plans given the ballooning budget deficit.

“It is not the president’s fault that he inherited such a terrible debt situation, but it will fall to him to provide leadership on how to fix it,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “It is quite welcome that they talk about paying for all the new initiatives, but the huge amount of upfront borrowing calls into question whether the promised savings would ever actually materialize.”

Here’s a look at some of the economic aspects of Biden’s plan:

The debt is not a hill to die on

The national debt surpassed the size of the economy last year, and it shows no sign of shrinking. The president’s budget projects that the total debt held by the public would more than exceed the annual value of economic output, rising to 117% of the size of the economy in 2031.

The administration believes that this is not the best metric for understanding the nation’s debt burden, which it acknowledges needs to be addressed in the long term. Much of the spending in the budget is “mandatory” for programs such as Social Security, Medicare and Medicaid.

Treasury Secretary Janet Yellen said Thursday that her preferred metric was how much the United States paid in interest on the money it had borrowed when compared with the overall economy. She noted that this burden would eventually rise, as interest rates do, but that the United States was expending relatively few resources to pay interest on the debt.

Net interest costs are $303 billion this year, or 1.4% of gross domestic product. That is well below the 2% of gross domestic product that they have averaged over the past 50 years, according to the Committee for a Responsible Federal Budget.

“It remains well within and under historic norms, and I think it needs to stay that way,” Yellen said of interest costs at a House hearing Thursday. “That’s a metric that I am looking at to judge the sustainability of federal finances.”

Bringing growth forecasts back to Earth

Administrations have long used overly rosy economic growth projections as a way to make their fiscal promises appear feasible. During the Trump administration, the White House envisioned years of sustained growth at 3% or beyond, making it possible for its $1.5 trillion tax cuts to pay for themselves and to provide a balanced budget.

The Biden White House avoids such gimmicks in its budget. It assumes that the economy will rebound to grow 5.2% this year and 4.3% in 2022 before settling to grow 1.8% to 2% for the rest of the decade. Those rates are in line with what the Congressional Budget Office has forecast.

The projections could open up the Biden administration to criticism that its policies are setting the United States up for years of sluggish growth — the same type of criticism that the Obama administration faced from Republicans. However, some economists argued Thursday that gross domestic product was not the best gauge of the economy’s health.

“Most importantly, a lot of the benefits of the President’s policies are improving inclusion, opportunity, climate,” Jason Furman, a Harvard professor and chair of the Council of Economic Advisers during the Obama administration, wrote on Twitter. “So even if they didn’t add anything to growth, they would still likely be an improvement.”

No inflation worries here

The biggest critique of the Biden economic agenda is whether the economy is overheating. Prices of nearly everything have been picking up in recent months, but the White House insists this is the “transitory” result of an economy that is starting to reopen. It blames signs of inflation on logistical issues such as shortages and supply chain bottlenecks rather than more fundamental matters.

The Biden budget largely sticks to this script. It projects that the consumer price index will rise to 2.1% this year, reach 2.2% percent in 2023 and then settle in at 2.3% annually from 2025 through 2031.

The steadiness of the numbers belies the fact that some Biden administration officials, including Yellen, have acknowledged as recently as Thursday that there would be high rates of inflation throughout the rest of the year.

The inflation bench mark in the budget will be a key one to watch as Republicans, including former President Donald Trump, have seized on the rising prices to argue that Biden has been bad for consumers.

Corporations will pick up the tab

To help pay for its proposals, the Biden administration is preparing an overhaul of the tax code, the brunt of which will be felt by large corporations.

The budget details the White House’s plan for a $2 trillion corporate tax hike, which would be achieved by raising the corporate income tax rate to 28% from 21% and imposing tougher measures to curb offshoring. The proposals for the corporate tax code reverse or change many of the provisions in the 2017 Tax Cuts and Jobs Act, which was Trump’s signature legislative achievement.

One key provision in that law that is not addressed, however, is the fate of the individual income tax cuts for low- and middle-income taxpayers that are set to expire before 2026. Biden’s budget proposal assumes that they will, in fact, sunset.

That puts the onus on the administration to propose a plan for additional tax cuts in order to keep the president’s pledge that no taxpayer who earns less than $400,000 will have their taxes go up.

The Republicans on the House Ways and Means Committee, which led the drafting of the 2017 law, took note of the omission.

“This is the latest example of President Biden abandoning his lofty promise that he can fund trillions of dollars in new spending simply by taxing the wealthy or corporations alone,” they said in a statement.