The Biden administration said Friday that the federal deficit fell by half from the year before, as Washington girds for new battles over taxes and spending with interest rates rising and Republicans expected to take back at least one branch of Congress in the midterm elections.
“The federal deficit went up every year in the Trump administration — every single year he was president,” President Biden told reporters, criticizing the GOP tax law of 2017 that added more than $1.5 trillion to the deficit. “On my watch, things have been different — the deficit has come down both years I’ve been in office, and I’ve just signed legislation that will reduce it even more in the decades to come.”
Biden also criticized congressional Republicans for pushing to expand the Trump tax cuts, arguing such a move would dramatically increase federal deficits. He accused the GOP of pushing cuts to Social Security — though Republicans have said their proposed changes to Social Security would not cut benefit amounts. And he criticized his opponents’ push to repeal key parts of the Inflation Reduction Act, his signature economic law that passed over the summer.
“If Republicans get their way, the deficit is going to soar, the burden is going to fall on the middle-class … They’re not going to stop there,” Biden said. “It’s MAGA-mega trickle-down.”
The new deficit estimate — widely expected by budget analysts — could help set the stage for fresh fights on Capitol Hill over taxes and revenue. GOP leaders have suggested in recent days that if they have more power in Congress next year, they may be willing to leverage a government shutdown or breach of the federal borrowing limit to demand spending cuts. That could lead to a reprise of the battles during the Obama administration, when lawmakers came close to triggering a worldwide economic calamity by failing to pay off America’s loan obligations.
While Biden is eager to tout the shrinking deficit, conservatives point out that it dropped relative to last year in large part because of the end of large spending programs he approved.
“It is terribly disingenuous for the White House to take credit for reducing the deficit simply because temporary pandemic spending expired on schedule,” said Brian Riedl, senior fellow at the Manhattan Institute, a libertarian-leaning think tank, and former chief economist to Sen. Rob Portman (R-Ohio). “Especially when they had helped drive up the deficit with the American Rescue Plan.”
The debates over the deficit will be further intensified by rising interest rates, which dramatically push up the cost of federal borrowing. The Federal Reserve has significantly raised interest rates as part of its battle against inflation, and it is expected to continue that campaign for the foreseeable future. That could add trillions to the cost of taking on debt, said Marc Goldwein, senior vice president for policy at the Committee for a Responsible Federal Budget, a think tank that pushes for lower deficits.
The Congressional Budget Office, Congress’s nonpartisan budget scorekeeper, has said interest payments on the debt alone could reach $1 trillion per year — roughly double their current amount — by 2030, and that figure does not account for the Fed’s latest rate hikes. Every one-point increase in projected interest rates translates into $2.4 trillion in additional debt over a decade, Goldwein said.
The danger of rising rates was also highlighted by recent events in the United Kingdom, where a pension strategy vulnerable to price hikes in British government bonds almost provoked a broader financial market panic. Prime Minister Liz Truss’s plans to increase the deficit with new spending and tax cuts caused rates to soar, causing the upheaval in British financial markets and ultimately leading to her ouster on Thursday.
“This raises the political cost of making the deficit worse,” Goldwein said. “The borrowing we’re doing now and the borrowing we’re doing in future years will bite into higher interest rate debt.”
The response to those rising costs, however, is likely to splinter lawmakers in Washington.
White House officials have repeatedly slammed Republicans this week for wanting to change Social Security and Medicare. GOP officials have denied they are aiming to cut benefits but said they want to ensure the long-term fiscal solvency of the entitlement programs. Republican lawmakers are also weighing whether to try to cut the clean energy spending in Biden’s signature Inflation Reduction Act intended to fight climate change, according to Stephen Moore, a former economic adviser to President Donald Trump who is in touch with GOP leaders. Democrats would fiercely resist those measures, which many experts believe are necessary in the fight against climate change.
“What I’ve been telling congressional leaders is the most important thing is to cut spending as much as possible,” Moore said. “The new deadly virus is out-of-control spending. They have to take a hatchet to the budget.”
Biden has touted the Inflation Reduction Act for lowering the deficit by almost $2 trillion over two decades, according to the Committee for a Responsible Federal Budget. But deficit hawks have criticized him for canceling what the Congressional Budget Office has estimated is roughly $400 billion in student debt payments.
Still, some economists have warned about the economic danger of cutting government spending at the same time that the central bank is raising rates — two forces that slow growth.