It is one of the oldest stories in American federal budget history. High deficits will be decreased by a better economy. Gross domestic product improvements, and the right mix of taxes, will drive up federal receipts. President Biden said as much as he introduced his own new budget:
My Administration is on track to reduce the federal deficit by more than $1.3 trillion this year, cutting in half the deficit from the last year of the previous Administration and delivering the largest one-year reduction in the deficit in U.S. history. That’s the direct result of my Administration’s strategy to get the pandemic under control and grow the economy from the bottom up and the middle out.
If only it could be this easy. History says it is not. Biden hopes to place higher taxes on people who make more than $100 million a year and on some corporations. Both groups have long histories of finding ways to decrease these burdens.
The administration expects GDP to rise from $22.4 trillion in fiscal 2021 to $25.6 trillion in fiscal 2023. Clearly, this assumes that inflation will not trigger a major slowdown in consumer spending, which has often been a primary cause of recessions. Another assumption is that the deficit as a percentage of GDP will drop from 12.4% in 2021 to 4.5% in 2023. A move of that magnitude may not be unprecedented but must be extremely rare. While a decline in expenditures is a major part of the budget math, so is an extraordinary rise in federal receipts, primarily from taxes. The forecast is that these will rise from just above $4.0 trillion in 2021 to over $4.6 trillion in 2023.
At this moment, the short-term economic future is more in question than in most years. In part, this is because of trouble in the global economy, which comes down largely to the Russian invasion of Ukraine. This could roil the world’s financial future for months, if not longer, as it further locks up the global supply chain, particularly for oil, gasoline and grain. Is Biden right? No matter how many people he employs in the Office of Management and Budget, no one could possibly know.
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