The Biden Budget Outlook

Former Vice President Joe Biden has won the presidency and a clear mandate to govern following the highest-turnout election since before universal suffrage. But voters were less kind to his allies in the Democratic Party, apparently reducing their majority in the U.S. House of Representatives to single digits and electing a U.S. Senate that will be evenly divided or narrowly under Republican control (pending two run-off elections in Georgia). As a result, Congressional Republicans – who spent the last four years indulging the Trump administration with trillions of dollars in unfunded tax cuts and spending increases – will surely use the unprecedented budget deficits President-elect Biden inherits as pretext to stymie his ambitious economic agenda. Biden will need to leverage his unique ability to work across the aisle and demonstrate that his objectives can be accomplished in a fiscally responsible way in order to overcome this conservative opposition.

Thanks to the pandemic recession caused by the coronavirus, almost one out of every two dollars spent by the federal government in Fiscal Year 2020 was financed with borrowed money instead of tax revenue. This $3.3 trillion deficit was equivalent to 16 percent of gross domestic product – the largest deficit since World War 2. Although the deficit for FY2021 is projected to be smaller, it is still projected to be roughly $2 trillion. As a result of the borrowing needed to finance these deficits, the national debt is on track to exceed the all-time high it reached at the end of WW2 (106 percent of GDP) before the end of Biden’s first term.

Senate Republicans have already begun using our nation’s alarming fiscal position as a pretext to undermine further fiscal stimulus and other measures to support the American people through the coronavirus pandemic. While Treasury Secretary Steve Mnuchin and House Speaker Nancy Pelosi were negotiating a $1.8 trillion relief bill to extend provisions of the CARES Act that expired in August, Senate GOP leaders said that the price tag is a non-starter with their caucus. Now that Republicans have probably preserved their Senate majority, it is unlikely that President Trump or President-elect Biden can get a stimulus bill much more than $1 trillion.

The GOP position on limiting stimulus spending is both hypocritical and misguided. The same Congressional Republicans who undermined the Mnuchin-Pelosi deal had no problem voting for a $2 trillion tax cut at the height of the last economic expansion, when the national unemployment rate was just half what it is today. There is simply no justification for offsetting the cost of policies to contain the coronavirus pandemic or mitigate its economic effects amidst a temporary national crisis when interest rates are at historically low levels. President-elect Biden can and should call out the hypocrisy of those who voted to run up the nation’s credit card during a time of prosperity only to pivot to pinching pennies in the middle of a national crisis.

After the pandemic has been contained and the economy has recovered, however, fiscal concerns cannot be easily dismissed. Unlike the period following WW2, when a booming population and economic growth caused the national debt to fall rapidly, today’s record-setting debts will continue to grow in perpetuity thanks to irresponsible tax cuts and an aging population and that is causing federal spending on health-care and retirement programs to grow faster than the revenue needed to finance them. What was once a concern for future generations is now one for current retirees and taxpayers: the Congressional Budget Office projects that Medicare’s Hospital Insurance Trust Fund will be exhausted before Biden completes his first term, while the Social Security Trust Funds are projected to exhaust within the next decade. If nothing is done to shore up these vital programs, beneficiaries face the prospect of deep and automatic across-the-board benefit cuts.

President-elect Biden can work with Republicans in Congress to balance the nation’s short- and long-term fiscal needs through the adoption of a “fiscal switch” that ties federal tax and spending levels to real economic conditions. So long as the economy remains in crisis, unemployment benefits should be increased to help laid-off workers help maintain their pre-pandemic income, otherwise healthy small businesses should be eligible for loans and other supports to help them survive the crisis, and state and local governments should receive federal assistance to plug gaping budget shortfalls created by the pandemic recession. As the economy recovers, these support programs should automatically be phased down, ensuring that they spend neither too little nor too much. Then, once the economy has fully recovered, other mechanisms should trigger to proactively reduce the nation’s structural deficits and pay back our debts. Establishing an agreement along these lines could make it easier for Republicans to support the temporary deficits needed to support our economy throughout the coronavirus crisis.

Tackling the federal government’s structural fiscal imbalance in this way could also help pave a path for enacting other parts of the ambitious economic agenda President-elect Biden campaigned on. Not including his proposals to tackle and recover from the pandemic recession, Biden proposed roughly $11 trillion in new spending over the next 10 years and only enough offsets to cover about half the costs. There is certainly a justification for deficit-financing some of his proposals that would contribute more to future economic growth than they would cost in added interest payments, such as combating climate change or making critical public investments in infrastructure, education, and scientific research. But much of Biden’s proposed spending falls outside that scope, and the reality is that funding for any of these priorities will be difficult to pass in divided government so long as Republicans can wield our unsustainable borrowing as a cudgel against them.

President-elect Biden is inheriting the worst fiscal situation of any president in U.S. history, one which the opposition in Congress can use to obstruct the ambitious agenda on which he campaigned. But this need not be the death knell for his bold progressive vision: as Vice President, Biden frequently cut deals with Sen. McConnell and other Republicans to end heated budget battles on behalf of the Obama Administration. If there is one person in national politics today uniquely equipped to convince Congressional Republicans and the American people that fiscal responsibility need not be in conflict with his plans to build America back better, it’s Joe Biden.