President Biden’s proposed budget for fiscal year 2024 is designed to seem fiscally responsible. While it includes a long list of spending increases for Democratic priorities such as paid family leave and expanded subsidies for pre-K, the White House claims it would reduce deficits in the next decade, mostly through new taxes on the wealthy.
But Biden’s plan still creates a looming fiscal debacle for one simple reason: rising interest payments.
Biden’s budget itself acknowledges this if you know where to look. While the plan shows that it would shrink the “primary deficit” — the shortfall of government revenue to cover its expenses — relative to current spending levels over the next decade, it also projects that interest payments would easily wipe out those savings.
Because of this, the budget expects total deficits to increase to more than $2 trillion by 2033. More than 60 percent of that shortfall would be due to interest payments.
At that point, the federal government would be borrowing more than $1.3 trillion that year simply to pay interest on the money it borrowed previously. That’s nearly triple what we’re spending on interest payments today.
This is madness. And it underscores just how difficult deficit reduction will become in the coming years because of our burgeoning debt.
Restoring sanity to our government’s finances will require both parties to sacrifice a lot of sacred cows. Republicans will have to raise taxes — a lot. And Democrats will have to stop adding new programs and cut back or reform many existing ones.
To understand the magnitude of the sacrifices needed, let’s pretend that Congress rejects all of Biden’s spending increases but passes all of his revenue raisers, including his tax increases and other measures to reduce spending. But even that would not be enough. It would only cut the 2033 deficit by about $530 billion, leaving a $1.5 trillion shortfall. Most of it — around $1.2 trillion — would be to pay the interest on our debt. The only way to bring those interest payments down is to reduce spending already baked into the budget.
This is why Republican budget hawks talk about cutting the domestic spending approved last year. The misleadingly named Inflation Reduction Act, the bipartisan infrastructure bill and the Chips and Science Act together added roughly $2 trillion in new spending over 10 years. Biden’s American Relief Plan spent trillions more to combat the coronavirus pandemic, and the 2022 omnibus funding package hiked non-defense discretionary spending by another 6.7 percent. Clawing some of that back would be essential to any serious effort to combat the deficit.
Entitlements such as Social Security and Medicare also need to be on the table. Those and other mandatory entitlements spending already comprise more than 60 percent of all federal spending. This would only grow under Biden’s proposals. You cannot come close to putting our finances in order without reforming these programs.
Both parties’ bases will roar. Progressives would howl about giving up their priorities and conservatives would protest any tax increases, just as they did when sinking the Simpson-Bowles commission’s 2010 deficit reduction proposals.
This suggests the deficit problem will only get worse. But prudent lawmakers might find creative ways to reach deal. For example, both progressives and conservatives believe elites are working against the average American: For conservatives, they are tech billionaires and universities; for progressives, they are big corporations and billionaires. So why not target both sets of perceived enemies simultaneously?
Conservatives, for example, might agree to take away certain tax benefits for the rich such as the health insurance premium exemption if they also get to tax the capital gains of universities and foundations with large endowments. Progressives might go along with increasing Medicare Part B premiums on well-off seniors if conservatives agree to eliminating farm subsidies for big agricultural companies. Combining enough of these bipartisan deals could save trillions of dollars.
Biden’s budget holds out the illusion that we can keep up the spend-and-borrow spree. It instead shows we’re rapidly approaching a fiscal wall. Both parties need to grow up to avoid a crash.