Latest federal budget projections rekindle debate: Do deficits matter?

February 13, 2021, 11:00 AM UTC
The eye-watering sums being borrowed by the U.S. government to finance pandemic-era spending have fueled the debate between deficit hawks and fiscal liberals.
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On Thursday, the government agency tasked with monitoring the federal budget released its projection for the 2021 fiscal year, and it was a doozy.

The U.S. government is expected to run a $2.3 trillion deficit this fiscal year, according to the Congressional Budget Office (CBO)—a number that doesn’t even factor President Joe Biden’s massive, $1.9 trillion COVID-19 relief package that is still making its way through Congress. While that figure is lower than last year’s record $3.1 trillion budget deficit, it would comprise more than 10% of the U.S.’s gross domestic product and represent the nation’s second-highest deficit since World War II on that basis.

Predictably, the eye-watering sums of money being borrowed by the U.S. government to finance its spending—including historically large, multi-trillion-dollar stimulus packages meant to aid the U.S. economy through a global pandemic—have triggered concerns among deficit hawks. The federal debt stood at 100% of U.S. gross domestic product at the end of fiscal 2020; that’s expected to hit 102% by the end of 2021 and climb to 107% by 2031, according to the CBO—levels of borrowing that many deficit-conscious observers consider unsustainable in the long term.

“Lawmakers should continue to pursue effective stimulus and relief programs that are targeted to the needs of the moment, but the CBO’s report also makes clear that we will need to return attention to our fiscal outlook once the crisis has passed,” Michael A. Peterson, chairman and CEO of the Peter G. Peterson Foundation, said on Thursday.

Yet Democrats in Washington have quickly taken a more positive view of the CBO’s economic projections, reportedly considering them to be rosier than anticipated and giving them license to pursue further spending. Those spending goals could include a sprawling infrastructure package that is believed to be a Biden administration priority.

Jason Furman, a senior fellow at the Peterson Institute for International Economics (not to be confused with the Peterson Foundation) and former chair of the White House’s Council of Economic Advisers during the Obama administration, said the CBO report “confirms that we have substantial fiscal space, in fact more than we’ve generally had in the past.” He noted that current, historically low interest rates translate into a lower debt service burden for the government, leading to only a “relatively gradual increase” in the U.S. debt-to-GDP ratio.

Since government spending measures like those being eyed by Democrats are designed to spur economic growth, part of their justification is that they would bolster federal tax revenues enabling the government to partially close its deficit gap. Yet another solution would be to raise taxes on corporations and wealthy individuals—something that President Biden proposed on the campaign trail, but which would likely face stern opposition from Congressional Republicans.

But even without tax hikes to pay for such measures, there appears to be growing consensus that deficits should not prevent policymakers from taking the actions necessary to lift the U.S. economy out of its pandemic doldrums. An op-ed last week by economist and former Treasury Secretary Larry Summers, which scrutinized the scale of Biden’s stimulus proposal and warned that it could trigger inflationary risks, sparked a prompt backlash from observers both inside and outside of the Beltway. Pro-spending economists, meanwhile, have stressed the need to avoid the mistakes of 2009, when relatively limited, post-financial crisis stimulus measures led to a long, slow-paced economic recovery.

“We have seen this failure before, with fiscal recovery efforts following the Great Recession of 2008-2009 that were insufficient and too short-lived,” Josh Bivens, director of research at the Economic Policy Institute think tank, wrote this past fall. “As a result of this austerity, it took a full decade for the labor market to return to even its pre-Great Recession health.”

And those on the left are happy to point out that budget deficits rose at a prolific rate under President Trump even before the pandemic, thanks in large part to his Republican administration’s generous tax cuts for corporations and high earners. That has prompted accusations that those on the right side of the ideological divide only care about deficits when “tax-and-spend” Democrats are in charge of the government.

With the CBO’s projections also indicating that government programs like Social Security are expected to remain solvent for years longer than previously forecast, Democrats are likely to push even more aggressively for the spending needed to enact their policy goals. According to the New York Times, some White House economic aides have discussed financing the President’s infrastructure proposal—which is expected to cost trillions of dollars—with deficit spending that would further add to the federal budget shortfall. That would enable the Biden administration to sidestep the thorny issue of tax hikes on Capitol Hill, potentially easing an infrastructure bill’s path to enactment. 

Of course, it would also likely add more fuel to the ongoing debate over the budget deficit, and how much debt policymakers in D.C. are willing to pile onto the U.S. government’s books.

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