WASHINGTON – On Thursday, March 9, President Biden will transmit to Congress his proposed budget for FY 2024. Although a Republican-controlled House means the Biden budget has little chance of enactment without significant modification, it represents an important starting point for negotiations and is an opportunity to initiate a national dialogue on our policy priorities: what do we want the federal government to provide and how do we want to pay for it?
The preliminary budget baseline published by the nonpartisan Congressional Budget Office (CBO) last month shows in stark relief the price of Washington’s addiction to debt-financed fiscal policy: soaring net interest costs and record debt in the next decade without draconian spending cuts or tax increases.
The fiscal challenges before the President and this Congress are numerous and significant. How can we stabilize the burgeoning debt-to-gross domestic product (GDP) ratio? How should we address the looming insolvency of Social Security and Medicare Part A that exists inside the 10-year budget window? Will Washington stumble into conducting its third war this century off-budget or should the defense budget reflect the potential costs of a protracted conflict in Ukraine and other geopolitical challenges? Given the growing structural imbalance between spending and revenues, should the temporary tax cuts enacted in 2017 be allowed to expire in 2025, as currently scheduled ? These are just a few.
When President Biden releases his budget for FY 2024, The Concord Coalition will be examining the blueprint for the following:
Adopts plausible economic assumptions
The state of the economy as measured by employment, productivity, inflation, and interest rates has a direct impact on the budget in terms of both taxes and spending. As the Federal Reserve continues to fight inflation by raising interest rates, the economic outlook remains uncertain. The budget should not rely on optimistic economic assumptions to avoid the hard choices needed to reduce future deficits.
Reduces the projected debt-to-GDP ratio over the budget window
Over the past 20 years, federal government debt held by the public has grown exponentially from 34.7 percent of the GDP in 2003 to a projected 98 percent in 2023. Much of this growth was caused by actions taken to combat the Great Recession of 2008-2009 and the COVID-19 pandemic of 2020-2022. But the problem goes far deeper than temporary spikes caused by major economic disruptions. Even before the pandemic hit, the debt was on an unsustainable path caused by an aging population (more beneficiaries for retirement and healthcare programs), rising per-capita healthcare costs, and a revenue stream that chronically falls short of outlays. The Congressional Budget Office (CBO) projects that under current law debt held by the public will hit a record 106.5 percent of GDP in 2028 and roughly double today’s level over the coming 30 years, hitting 195 percent of GDP in 2053.
As the effects of the pandemic began to fade, the budget deficit came down considerably in 2022. This “pandemic dividend” will be short-lived, however, as the structural imbalance that pre-dated COVID returns and large, growing annual budget deficits re-emerge. According to CBO, current law annual deficits would average $2 trillion over the next 10 years. While it is impossible to say when the accumulation of debt reaches a tipping point, our current path is an irresponsible and needless experiment in finding out what that tipping point might be. President Biden should propose an end to this experiment by acknowledging the consequences of inaction and laying out a set of policies that would reduce the projected debt-to-GDP ratio over the next 10 year. It is clear that legislative actions are needed to put the budget on a sustainable path and the sooner such actions are taken, the more effective they will be.
Includes a down-payment on Social Security and Medicare reform
The Social Security and Medicare Part A trust funds are projected to be insolvent by 2033, within the 10-year window covered in the FY 2024 budget. After that date, under current law beneficiaries and providers will no longer be paid in full or on time, effectively reducing their benefits by 22 percent and 15 percent, respectively. To avoid that result, the budget should include reforms to ensure the long-term financial viability of these programs.
Submits a defense budget that reflects the Administration’s Ukraine policy
According to the Congressional Budget Office, between FY 2022 and FY 2023, the Congress and President Biden appropriated $113 billion in military, humanitarian, and financial aid for Ukraine – all of it designated as an emergency. As the conflict enters its second year with no peaceful resolution in sight, the Biden Administration must budget accordingly. The U.S. has already prosecuted two wars off the books (in Iraq and Afghanistan) this century and should not repeat this practice for a third time. The Biden budget must be realistic about its objectives in Ukraine and find a way to pay for these costs without adding to the national debt.
Explicitly reflects the fate of the 2017 temporary tax cuts after 2025
The Tax Cut and Jobs Act of 2017 reduced marginal tax rates for corporations and individuals, as well as small businesses that file as individuals like partnerships and S-corporations. To keep costs within the constraints imposed by budget rules, however, the tax cuts for individuals and small businesses were written to expire after 2025. Will the Biden budget allow the tax cuts to expire as scheduled? If not, how is the extension of the tax cuts reflected in the budget? Are the costs offset somewhere else?
Reflects realistic costs of executive actions on student loan programs
Earlier this year, the Department of Education proposed to modify one of its existing income-related repayment plans, making it more generous to students and more costly to the government. The Department originally estimated it would cost $139 billion over ten years. But subsequent analysis from the Penn-Wharton Budget Model suggests the cost would be substantially higher. The budget should reflect the increased participation, additional borrowing, and higher tuition that will result from the new student loan proposal.
Refrains from using budget gimmicks
University of Chicago Economist Milton Friedman famously said, “There’s no such thing as a free lunch,” but budgets often try to feed us one anyway. Past presidential budgets from both political parties have resorted to gimmicks that make it difficult to evaluate the true budgetary effects of their plan. Examples include: tax cuts that are intentionally sunset to hide the expense of making them permanent; projection windows that are shortened (e.g. from 10 years to 5) to cloud the long-term deficit effects of spending proposals; packing policy changes (like the extension of temporary tax cuts) into the baseline when the costs instead should be attributed to the president’s post-policy totals; the inclusion of zero-cost “placeholders” – policy outcomes the administration wants to achieve but decided to punt to Congress. Simply put: a fiscally responsible budget is a transparent budget.
Fully offsets any new tax cuts or spending increases
To avoid exacerbating an already unsustainable trajectory of deficits and debt, the Biden budget should at a minimum fully offset the cost of any new program or tax cut in each year of the budget window. Offsets should not be put off until the second half of the budget window, relying on a future Congress to preserve them. The objective of this “pay-as-you-go” (PAYGO) principle is budget neutrality. It uses the threat of sequestration (an across-the board cancellation of certain enacted spending) to ensure that new mandatory spending and revenue legislation, on average, does not add to projected baseline budget deficits.
The effects of ignoring PAYGO can be seen in the current baseline. According to CBO, Congress added $824 billion in new mandatory spending in FY 2022 but increased revenues by just $84 billion. In a time of expanding deficits, PAYGO makes more sense than ever. It would not, by itself, reduce deficits but it would promote fiscal responsibility by requiring that every entitlement expansion or tax cut be subjected to a simple question: How will it be paid for? Forcing an answer to this question is perhaps the most important thing politicians can do immediately to stop digging the fiscal hole deeper.