How Existing Budgetary Commitments Could Affect President Biden’s Domestic Policy GoalsPosted: May 13, 2021
The COVID-19 pandemic and accompanying recession laid bare many of the needs of working families and children, as well as federal, state, and local governments’ historic inattention to public health needs and preventative health care. In 2020, Congress responded by enacting approximately $3.5 trillion in economic relief bills. So far this year, it has approved another $1.9 trillion of relief through the American Rescue Plan. And President Biden has proposed two new initiatives that, combined, would cost roughly an additional $4 trillion.
Yet, all these efforts may still fail to achieve any long-term shift in the federal government’s domestic priorities. That’s partly because most of that relief was temporary, just as is much of 2021 spending either enacted or proposed.
To examine the potential long-term limits of these types of changes, our new report compares the budget projections in CBO’s February 2021 update, assuming a forthcoming end to the pandemic and recession, to its pre-pandemic January 2020 projections. While the February 2021 report does not include 2021 changes recently enacted or proposed, it does show the combination of the COVID-19 economy, low- and middle-income tax cuts (including economic relief payments), and significant new spending drove the federal budget deficit to more than $3 trillion in 2020, its highest level as a share of GDP since World War II.
In our report, we focus on inflation-adjusted (real) changes in revenues and spending in 2030 compared to 2019. Crucially, most of these changes were built into the law pre-pandemic and unchanged during the past year, so considering only new legislation would miss most of what is happening to the budget over time.
Most new revenues are driven by economic growth rather than legislated tax increases. Even in absence of any new legislated tax increases, CBO projects real revenues will rise by about 31 percent, or $1.067 trillion, in 2030, as compared to 2019, largely due to a growing economy. There is almost no difference between CBO’s pre- and post-pandemic projections for 2030 revenues.
Spending would increase by $1.424 trillion in 2030 relative to 2019 under the February 2021 projections, only slightly less than the increase CBO projected in January 2020. Most of this substantial spending growth, such as the automatic increases in annual Social Security benefits, was locked in years ago. By allowing most spending growth to occur automatically, today’s Congress passively cedes much of the power of the purse to past Congresses.
Spending growth is focused on retirement benefits and health care. Again, excluding new 2021 legislation but including the 2020 pandemic spending, more than one-third of total growth in annual spending in 2030 as compared to 2019 would be due to Social Security. Medicare would absorb about 32 percent, higher interest on the debt, 13 percent, and Medicaid and other health care subsidies, 12 percent.
By comparison, other spending growth would be relatively modest, declining substantially in relative importance. For example, other mandatory spending would decline by about $9 billion in real terms, while nondefense discretionary spending would increase by $93 billion. Defense spending during this period would rise by roughly $48 billion.
Overall Social Security, health, and interest on the debt would comprise 90 percent of the total growth in spending and about 120 percent of the revenue growth, again a very similar percentage to what was predicted pre-pandemic.
We will include 2021 legislation in further analysis when more data on the president’s latest proposals are available. One factor likely will become far more important in that analysis: While interest rates fell enough in 2020 to offset an increase in projected interest costs that usually accompanies deficit increases, the financial markets are starting to project higher long-term interest rates. So new additions to debt likely will show up more readily in higher interest costs.
Much of the new spending proposed by President Biden in his American Jobs Plan and American Family Plan is less targeted to the pandemic and more to longer-term needs of working families and children. Still, much is proposed only for a few years, with revenue increases stretched out over longer periods of time.
Even if Congress enacts these changes, President Biden’s inability so far to address the rising unfunded increases in retirement and health costs, along with higher interest costs, leave him still facing huge headwinds pushing back against any significant and permanent shift in priorities.
This column originally appeared on TaxVox on May 13, 2021.