The arithmetic problem of the Biden budget
President Biden’s first comprehensive budget, released last month, calls for a sharp increase in social spending, paid for both by steep tax hikes and large deficits and new public debt. The budget, which outlines the major new spending initiatives in the US bailout, the US jobs plan, and the US family plan, represents nothing less than a transformation in the role of government in the economy. .
Many economists, including Lawrence Summers, have pointed to the risks of the budget’s extravagance, namely inflation. But going further, the budget creates structural fiscal risks by crowding out future spending on things unrelated to the Biden administration’s social agenda. It limits the government’s flexibility to meet urgent future needs without tax increases much larger than those proposed in the budget. And the plan’s focus on basic income rather than work is a step in the wrong direction. These risks can be addressed – and gradually – but this budget must get back to the starting line.
For starters, the Biden budget would undermine the federal government’s ability to provide public goods and social insurance, manage crises such as pandemics or financial panics, and fill gaps in economic opportunity, while imposing a hefty debt service bill to future generations very little of today’s spending blitz.
Remember the maxim: “When you find yourself in a hole, stop digging”. The Biden administration must put the shovels down. New permanent social spending should be financed by additional tax revenues so as not to add to already high levels of deficit and debt. Borrowing would be allowed for one-time expenses that increase productivity and future wealth (and the ability to pay taxes) – for example, real infrastructure such as roads and bridges.
But the Biden budget does not follow this advice. He spends more money on social causes and expands government without generating enough new revenue to pay for it. The budget proposes to spend 24.5% of gross domestic product on average over the next 10 years. The post-World War II record before the pandemic was 24.4% in 2009, and the 50-year average is closer to 20%. In the meantime, revenue is only expected to increase to 19.7% of GDP by the end of the 10-year budget period, just below the record 20% share in 2000 during the dowry boom. com. The gap reflects additional pressure on deficits and debt even as growing deficits in social security and health insurance programs pose a significant challenge.
What Mr. Biden is trying to achieve with his budget cannot be accomplished simply by “taxing the rich.” The proposed increases in corporate tax are already affecting employees with annual incomes of less than $ 400,000 because part of the corporate tax is paid by the workers and not by the owners of capital. And higher capital gains taxes also weigh on middle-income shareholders, as high-income individuals are marginal investors in the stock market, with their higher tax burdens lowering stock prices.
The much bigger problem is arithmetic. Such tax increases cannot come close to financing the additional social spending proposed by the president’s budget. Closing the gap would require a general increase in taxes. European governments offering such social spending do not rely on high corporate or capital taxes, but on consumption taxes, i.e. value added taxes. Ordinary taxpayers foot the bill.
Social Security and Medicare trust funds are headed for depletion in the coming decades unless the Biden administration finds a way to slow the growth in spending on benefit programs. The trick is to do this while also boosting benefits for people with low and modest incomes. The right approach is to set a high minimum benefit, with little or no increase for high income recipients.
The Biden administration is also expected to try to sideline workers by investing in the ability of community colleges to provide skills training for the jobs needed by local employers and in communities with low employment rates. Such spending would strengthen the progressive mission of the Biden budget and make people work. The federal government should not encourage people not to participate in the economy.
President Biden’s budget is bold, even transformative. It is also risky and ill-conceived. As currently constructed, it falls short of the task of increasing economic participation. It neither recognizes nor is constrained by fiscal reality. Progressives can pivot to achieve the president’s goals, but only by daring to ask American taxpayers – all taxpayers – to pay the costs.
Mr. Hubbard, professor of economics and finance at Columbia, was chairman of the Council of Economic Advisers under President George W. Bush.
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
Published in the print edition of June 21, 2021.