Deficits Are Here to Stay

Last week President Biden released his Fiscal Year 2023 budget proposal. The annual release of the budget proposal is always exciting for economists that study public finance. The president’s proposal is the first step in the federal budgeting process, which in some cases leads to the full passage of a federal budget by the start of the fiscal year in October (though perhaps surprisingly, the process rarely works as intended).

This year’s budget is especially interesting to look at because it gives us our first look at what post-pandemic federal budgeting might look like. And while the budget has a lot of detail on the administration’s priorities, I like to go right to the bottom line: does the budget balance? What are total spending and revenue levels?

The bottom line in the Biden budget this year is that permanently large deficits are here to stay. Keep in mind that a budget proposal is just a proposal, but it’s reasonable to interpret it as what the president wants to see happen with the budget over the next 10 years (even if Congress might want something different). Over the next 10 years, Biden has proposed that budget deficits remain consistently right around 4.5% of GDP, with no plan to balance the budget in the near future.

How does this compare to past budget proposals? For comparison, I looked at the final budget proposals of Biden plus his two predecessors. I start Obama’s in 2021 to match Trump’s first year, and all three overlap for 2023-2026. I put these as a percent of GDP so we don’t have to worry about inflation adjustments (though we might worry about optimistic GDP forecasts, see below).

Looking at the chart, we can see that Trump’s final budget proposal had the budget coming close to balancing by the end of the budget window. Though important caveat on Trump’s budget: it assumes 5% economic growth throughout the next 10 years. Not only did that clearly not happen in the very year it was proposed (hello pandemic recession!), but it was probably overly optimistic even before we take into account how much the world changed in early 2020. The Biden and Obama budgets assume a slightly lower 4-4.5%. That might not seem like much, but it can greatly affect what the budget outlook shows, since faster growth boosts tax revenue (lower deficits) and also boosts the denominator used in that chart.

I think the more interesting comparison is to Obama’s 2017 budget. As we can see in the chart, Obama’s budgeted deficits are almost half of Biden’s coming in around 2.5% of GDP as a long run average. These are two men with similar ideologies and budget goals, and they assumed similar economic performance in their projections.

Why the difference? In total, we’ve got a roughly 1.8 percentage point difference to account for between in Obama and Biden in their 2026 numbers (the last year in Obama’s budget window). The biggest difference is on the revenue side, with Obama budgeting for tax revenue to be 20% of GDP, but Biden just 18.7% (for reference, Trump’s was 17.3% of GDP in 2026). Spending under Biden in 2026 is also about 0.5 percentage points higher as a percent of GDP.

In short, we can say that Biden is proposing a little more spending than Obama, but a lot less in tax revenue. And this budget from Biden includes his proposals for raising taxes, such as his proposed minimum tax on billionaires.

It’s also important to keep in mind that this budget won’t be the actual budget that Congress passes. In fact, Congress may not pass a budget at all, as has become business-as-usual over the past few decades. But if Biden’s budget proposal does in some way reflect the new reality, it will be a very different from our past experience with debt and deficits.

Here’s a chart for historical perspective. While budget deficits of 4.5% of GDP are not unheard of, in the past they have almost always been temporary and followed recessions. Permanent deficits that large would be a brave new world for public debt in the US.

One thought on “Deficits Are Here to Stay

  1. Scott Buchanan April 12, 2022 / 11:38 am

    I think the rapid multitrillion dollar response to COVID turned us all in MMTers — – the feds can burp out any amount of deficit spending they want , indefinitely. Well, until it tips us into inflation. Whoops.

    Like

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