After enactment of the $1.9 trillion American Rescue Plan Act and the unveiling this week of the roughly $2 trillion American Jobs Plan, it is easy to forget that President Biden hasn’t actually put out a budget. In fact we’re likely to see another major plan of about $2 trillion for what Biden has called the “American Family Plan” before we see how it all adds up.
Looking at these major packages one at a time provides some sense of where things are headed, but we need to see detailed proposals all in one place before being able to assess their total cost, economic effect, trade-offs and political viability. In other words, we need to see a budget.
Presidential budgets are advisory, but Democratic control of both the House and Senate means that President Biden’s proposals are likely to receive serious consideration. Moreover, careful scrutiny of this budget is important because history has shown that the priorities set in the first budget of a new administration tend to influence fiscal policy decisions for the next several years. That will certainly be the case with this budget as Biden seeks to “change the paradigm” towards a more active role for the federal government.
A complete and detailed budget is expected later this year, possibly in May. In the meantime, we can take some clues from the American Jobs plan, often described as the “infrastructure” portion of the budget. The plan as outlined in a White House “Fact Sheet” identifies more than 45 spending initiatives and more than a dozen provisions to increase corporate income taxes.
Significantly, in this plan the Biden Administration has embraced the commitment that its infrastructure investments should be paid for. The roughly $2.3 trillion of new spending is offset with a similar amount of new revenue. It is true that the spending is calculated over eight years while the revenue is calculated over 15 years, meaning that there would be a deficit increase over the traditional 10-year window. That gap should be narrowed or eliminated in subsequent negotiations, but the salient point is that the proposal was presented as one that would eventually balance out.
That said, there are good reasons to be skeptical that the plan would ultimately pay for itself. Short-term deficit financing might be appropriate for investments in physical infrastructure such as roads, bridges, water systems, and public transportation but the Biden infrastructure plan goes well beyond such one-time investments. Much of the new spending, such as expanded access to home care, long-term care, workforce development and research and development, is not intended to be temporary. It will have a longer cost that is not reflected in this initial proposal. Moreover, the estimated costs of the spending proposals are much more specific than the estimated revenue increases from the tax changes put forward as offsets. The White House Fact Sheet simply lumps all the tax changes together in estimating that they would raise over $2 trillion over the next 15 years. Even so, it is important that the administration has publicly committed to pay for its new plans with something other than debt.
They should stick with this commitment as the rest of the budget is rolled out. As a matter of context, the debt is already on an unsustainable path with the Congressional Budget Office (CBO) projecting deficits exceeding $1 trillion annually beyond 2024 and the debt reaching a record 107 percent of the economy within 10 years and rising perpetually thereafter. Even proposals that credibly pay for themselves over a 10 or 15 year period would do nothing to address this underlying fiscal challenge.
Another problematic aspect of the American Jobs Plan is the narrow category of offsets it employs. They are concentrated on taxing business income and while that is a legitimate source of revenue, there are no spending cuts and the revenue increases are severely restrained by the President’s promise that no household earning less than $400,000 will see a tax increase.
That definition leaves out any sort of broad-based source of revenue such as a gas tax, a vehicle mileage tax or a value added tax (VAT). Traditionally, consumption or user-pay taxes have been used to finance infrastructure spending and they should not be taken off the table, particularly when the proposed spending is of the magnitude contained in this plan.
The American Jobs Plan shows us just a portion of what President Biden’s first budget will look like. It identifies many important goals, such as investing in transportation infrastructure, broadband access and clean energy while boosting research and development. But the plan's sprawling scope on the spending side and limited scope on the revenue side raises questions about its fiscal and political viability that cannot be fully answered until we see his remaining proposals. Moreover, the buoyant March jobs report, building on a very positive February report, indicates that the economy may finally be on the mend and that the focus of Biden’s infrastructure plan should be investments that enhance productivity, not necessarily job creation.