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Biden’s plan to spend $ 4.5 trillion without increasing the deficit depends on factors beyond his control



WASHINGTON – President Biden’s $ 1.9 trillion aid package Covid-19 was funded solely with borrowed money. Now he proposes to spend another approx. $ 4.5 trillion on infrastructure and social programs – without adding the red ink.

“We can do that without increasing the deficit,” Biden said in a joint speech to Congress Wednesday night, detailing a series of tax increases on wealthy and businesses to pay for programs ranging from building charging stations to electric cars to subsidizing child care. .

Mr. Biden’s ability to achieve this goal depends on a number of political and economic variables, some beyond his control. Among them: Whether moderate Democrats will follow his proposed tax increases, and whether those increases remain in place long enough to cover all the extra costs.

Overall, the proposals will add approx. $ 1

.3 trillion for government deficits over the next 10 years, according to estimates by analysts at the Committee on a Responsible Federal Budget and the cornerstone of macro-research. They say the shortcomings will eventually be offset in the following years as tax increases continue and some of the expenses win down. Over time, they add, government debt – which represents decades of accumulated budget deficits – may begin to decline as a share of economic output.

“I think it’s clear that the framework for these proposals is to spend early, create a lot of investment that they think will have a lasting return on the economy and reduce the very long-term debt,” said Marc Goldwein, senior vice president at the non- partisan CRFB based in Washington.

But Mr Goldwein said it was risky to rely on revenue more than 10 years in the future. When Democrats passed the Affordable Care Act in 2010, they included provisions to raise revenue that have since been repealed.

President Barack Obama signed the law on affordable care in March 2010 in the White House.


Photo:

jason reed / Reuters

Federal deficits, which were historically high and growing before the pandemic, have risen since March 2020, when Congress passed several spending measures to fight the virus and dampen the U.S. economy from a recession, and as widespread business closures and layoffs weighed tax revenues.

It drove U.S. public debt from $ 17.4 trillion before the pandemic hit $ 21.6 trillion when Mr. Biden joined or approx. 100% of economic output – which put the United States in a league with heavily indebted countries like Japan. Some economists have warned that deficit-driven spending could raise interest rates and increase inflation, although this has not happened in the United States or Japan in recent decades.

Republicans have pointed to the rise in government debt as a reason to use restraint, and they warn that tax increases could hurt the economy by discouraging private investment. Senator Tim Scott (R., SC), who provided the GOP response to Mr. Biden’s congressional speech on Wednesday called his plans “a liberal wish list of major government waste.”

South Carolina Senator Tim Scott delivered the Republican response to President Biden’s speech Wednesday, calling it a ‘liberal wish list of major government waste.’


Photo:

Associated Press

Some Democrats have noted that the $ 1.5 trillion in GOP tax cuts passed in 2017 – which Republicans said would pay for themselves by stimulating growth – contributed to larger budget deficits before the pandemic.

In recent years, there has been a shift in consensus among many economists over the dangers of deficits and debt, with some, including Mr.Biden’s own advisers, arguing that at a time when interest rates and inflation are expected to remain very low, capacity to borrow more than previously thought wise.

Sir. Biden embraced these arguments when he called for a $ 1.9 trillion deficit-funded Covid-19 relief package, saying it was worth borrowing to drive the U.S. recovery and avoid long-term damage to the economy.

The emergency package adopted in March, known as the U.S. bailout plan, is expected to increase government debt as a share of the economy to 108% for the fiscal year 2021 from 102% before it was adopted, according to the CRFB.

Now Mr Biden has proposed two more packages – one focused on infrastructure and the other on families – which he says will boost long-term growth with new spending on roads, bridges, research and development, clean energy, affordable childcare and paid family leave. , among other programs.

In his first speech to Congress, President Biden called for large federal investments, including $ 2.3 trillion in infrastructure and $ 1.8 trillion in family and education programs. Gerald F. Seib unpacks the four most important takeaways from the speech. Photo illustration: Ksenia Shaikhutdinova

To pay for these plans, he wants to raise the corporate tax rate to 28% from 21%, raise the top capital gain to 43.4% from 23.8% and tax gains on assets as if they were sold when someone dies – proposal that would generate sufficient revenue over the next 15 years to offset the cost increases and extended tax deductions, the White House said.

Finance Minister Janet Yellen said on Sunday that interest rates are low and likely to remain low, “but we need fiscal space to be able to tackle emergencies like the one we have been in with regard to the pandemic.”

“We do not want to take advantage of all this fiscal space, and in the long run, deficits must be limited to keep our federal economy on a sustainable footing,” she told NBC.

All in all, the two new packages require about $ 4.5 trillion in new spending and $ 3.2 trillion in revenue over the next 10 years. The revenue gap, about $ 1.3 trillion, would be covered by higher taxes over the next five years, the White House said.

CRFB estimates that Mr. The bid’s $ 2.3 trillion infrastructure proposal, called the American Jobs Plan, would increase the deficit by approx. $ 900 billion over 10 years and increase debt to 116% of gross domestic product by 2031.

Thereafter, the plan would begin to reduce deficits and debt would grow to 146% of GDP by 2041 or less than the 149% currently expected by the Congressional Budget Office.

President Biden’s U.S. job plan would direct $ 2.3 trillion in infrastructure modernization costs, including roads, bridges and service lines; supply workers installed new water pipes in Oakland, California, last month.


Photo:

Justin Sullivan / Getty Images

For this to happen, however, Mr Goldwein said, decision-makers will need to allow temporary spending programs such as an extended child tax allowance to expire as planned and ensure that permanent tax increases remain in place – factors that depend on which party controls Congress and the White House.

The CRFB estimate is in line with an analysis from the Penn Wharton budget model, which showed that Mr. The bid’s infrastructure plan would increase debt over 10 years, but reduce it significantly by 2050 compared to current CBO projections.

While the higher taxes help the fiscal outlook, Penn Wharton found that they would ultimately reduce economic growth by discouraging business investment.

Finally, the U.S. Family Plan, which includes universal kindergarten, two years of free community college and a nationally paid parental leave program, calls for $ 1.8 trillion in new expenses and $ 1.5 trillion in tax increases over the next 10 years.

Sir. The bid’s spending and tax proposals in the infrastructure and family packages together appear to pay for themselves over 15 years, but there is still uncertainty, said Donald Schneider, an analyst with Cornerstone Macro Research and a former GOP congressional assistant.

For example, the administration estimates that its proposal to increase funding for the Internal Revenue Service by $ 80 billion. Over the next decade to increase tax enforcement would generate approx. $ 700 billion. In additional net income over the period, more than other estimates have suggested, he said.

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It is also an open question whether Mr. Biden can gain enough support in Congress to advance all of his plans. As Republicans oppose new major spending programs and tax increases, the president will need the support of almost all Democrats.

Some moderate Democrats, including Sen. Joe Manchin of West Virginia, have expressed reservations about his tax increases. If Democrats do not get behind all of his tax proposals, Mr. Biden will be forced to accept some deficit increases or reduce its spending plans, a move that would draw objections from progressives.

Write to Kate Davidson at kate.davidson@wsj.com

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