This week on Facing the Future, Concord Coalition Policy Director Tori Gorman and Chief Economist Steve Robinson joined me to preview President Biden’s State of the Union Address and his Fiscal Year 2025 budget. In looking at the upcoming budget, scheduled to be released on Monday, March 11, we used a set of criteria developed last year.
Presidential budgets don’t have the force of law and are usually declared “dead-on-arrival.” But the president’s budget is still important, particularly in an election year, because it will set out the president’s priorities and tee-up the issues he would like to run on.
In our conversation, we focused on whether the president’s budget adopts plausible economic assumptions, reduces the projected debt-to-GDP ratio over the budget window, Includes a down-payment on Social Security and Medicare reform, and explicitly reflects the fate of the 2017 temporary tax cuts after 2025.
Robinson said that “the key variable in any budget projection these days is the interest rates. When you’ve got $30 trillion plus in federal debt, every percentage point rise in interest rates adds $300 billion dollars to the cost of servicing the debt. It’s anybody’s guess where interest rates are headed, but they are critical in making budget assumptions, particularly out over 10 years, because the interest costs compound over time. And, as we’ve all remarked here on the show many times, interest costs are the fastest growing part of the Federal budget and we’ll be spending more on interest than we are on defense next year, and interest costs continue to rise thereafter. So that’s clearly a big issue and a big concern.”
Stabilizing the debt-to-GDP ratio is also an important criteria because it is currently on an unsustainable path. Over the past 20 years, federal government debt held by the public has grown exponentially from 34.7 percent of the GDP in 2003 to 97.3 percent in 2023. The Congressional Budget Office (CBO) projects that under current law debt held by the public will hit a record 106.6 percent of GDP in 2028 and continue rising to 172 percent of GDP in 2054.
A realistic plan to stabilize the debt will likely require a mix of spending reductions and revenue increases. On the spending side, a key question is whether the budget contains any cost-saving reforms of Social Security and Medicare.
“I don’t expect to see a lot of real progress there,” Robinson said. He pointed out that although both programs are facing trust fund insolvency in about 10 years, last year’s budget did not contain real reforms. “The President didn’t have anything to say or do about Social Security and the provision he had for Medicare was questionable. It really added very little and new resources to help pay the benefits. So we were critical last year of his accounting gimmick as a way to shore up the Medicare Part A Trust Fund.”
Gorman said she would be looking at how the administration deals with the scheduled expiration of tax cuts enacted in 2017. The Tax Cut and Jobs Act of 2017 reduced marginal tax rates for corporations and individuals, as well as small businesses that file as individuals like partnerships and S-corporations. To keep costs within the constraints imposed by budget rules, however, the tax cuts for individuals and small businesses were written to expire after 2025. Gorman discussed whether the Biden budget will allow the tax cuts to expire as scheduled and, If not, how the extension of the tax cuts will be reflected in the budget (i.e. paid for).
“One of the things that really gets frustrating for me about Presidents’ budgets is that they talk about the things that they want to talk about, but they don’t talk about the things that they don’t want to talk about, that are out there, and we know are coming. We know that the Trump tax cuts are going to expire in 2025. It would be nice if the Biden budget actually took a position on what happens. Last year’s budget was silent in that respect. According to some estimates, it’ll be about $3 trillion dollars to extend those tax cuts.”
Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
