President Joe Biden took a victory lap on Friday for the biggest one-year drop in the federal deficit in American history.
That’s despite the fact that deficits remain historically high and all of the record-breaking $1.4 trillion deficit drop is driven by the fact that emergency Covid spending has lapsed.
Hours later, Biden championed his student debt forgiveness program – a program that completely wipes out the modest deficit savings created by the Inflation Reduction Act.
The dueling narratives from Biden perplexed some budget watchers who remain deeply concerned about America’s mountain of debt.
“It does strike me as contradictory,” Dan White, senior director of economic research at Moody’s Analytics, told CNN on Friday. “On net, the policies of the administration have increased the deficit, not reduced it.”
Maya MacGuineas – president of the Committee for a Responsible Federal Budget, a deficit watchdog group – said besides the Inflation Reduction Act the Biden administration has made the fiscal situation worse, not better.
“The White House is knowingly twisting the facts to tell a very different story than a fair and accurate one,” MacGuineas told CNN on Friday.
Asked about the optics of cheering deficit reduction hours before highlighting the student debt program, MacGuineas was baffled.
“It seems a little insulting to the audience,” she said, “as though you could trick us by taking claim for fiscal responsibility – which isn’t warranted – and separate it from this huge deficit-busting executive order that is costing hundreds of billions of dollars.”
The White House did not respond to a request for comment on the criticism.
But David Kelly, chief global strategist at JPMorgan Funds, said the Biden administration does deserve credit for a strong economy that has helped boost tax revenue.
“The economy has fully recovered from the pandemic. And that is helping push the deficit down,” Kelly said.
‘Drop in the bucket’
The Inflation Reduction Act is projected to slash the federal deficit by $238 billion over 10 years, according to the Congressional Budget Office. However, most of those savings are slated to hit during the back of the decade. And that is relatively small savings relative to America’s $31 trillion in debt.
“Two-hundred-thirty-eight billion dollars is really a drop in the bucket,” White said.
In any case, Biden’s student debt relief, which will help millions of borrowers, will more than offset those savings. The CBO projects the student debt forgiveness will increase the deficit by $400 billion.
The good news is that deficits are indeed shrinking – and shrinking faster than many imagined possible. That should lower the risk of a debt crisis or pressure from financial markets that forces draconian budget cuts.
The Treasury Department said the annual budget shortfall plunged to $1.4 trillion during the fiscal year that ended September 30. That is a massive improvement from the record high of $3.1 trillion in fiscal 2020.
The bad news is deficits remain very high, surpassing that of any year except during the peak of Covid and during the Great Recession.
The Covid emergency is over
And it’s important to understand why the deficit is down so sharply. It’s not because the government has gotten massive spending programs like Social Security or Medicare and Medicaid on a sustainable path. It’s because emergency Covid spending that drove up the deficit to new heights has lapsed. The bailouts for airlines, stimulus checks and forgivable loans are in the rearview mirror, thankfully.
“That is the only reason,” White from Moody’s said. “If the Biden administration should take credit for anything, it’s not making things even worse than they were.”
The Committee for a Responsible Federal Budget estimates that more than 100% of the deficit reduction for fiscal 2022 is due to shrinking or expiring Covid relief. The group estimates that Biden’s actions to date have increased deficits by $4.8 trillion through 2031.
“I’d love to give the White House credit. Unfortunately, their record doesn’t give you anything to cheer about,” MacGuineas said
Biden vs. Trump on debt and deficits
Biden correctly noted during his speech Friday that deficits increased throughout the tenure of his predecessor, former President Donald Trump, the self-proclaimed King of Debt.
“The federal deficit went up every single year in the Trump administration, every single year he was president,” Biden said. “It went up before the pandemic. It went up during the pandemic.”
Those increases reflected not just the Covid emergency spending by the controversial tax cuts that failed to live up to the hype.
“On my watch, things have been different,” Biden said. “The deficit has come down both years that I’ve been in office.”
MacGuineas agreed that Trump had a “terrible” record on the deficit and yet struggled to say that Biden has done a better job on this issue.
“Both of them, during times of economic strength, continued to borrow in fiscally reckless ways,” MacGuineas said. “Neither of them demonstrated an iota of fiscal responsibility – other than eight days after Biden signed the Inflation Reduction Act.”
Borrowing costs rising fast
Looking ahead, US policymakers still face a serious challenge in getting the fiscal situation on a stronger footing.
Kelly, the JPMorgan executive, is encouraged by the fact that the debt-to-GDP ratio, a closely watched figure, appears to have peaked, for the moment at least.
“We are in a better place. But we really need to make policy in a logical way to meet the actual needs of the economy, not just in a way to get votes,” Kelly said. “Both parties are guilty of that.”
MacGuineas is more concerned, pointing to the fact that Uncle Sam’s borrowing costs have gone up because the Federal Reserve has sharply raised interest rates to fight inflation.
“This is the moment we have all been worried about,” MacGuineas said.
White similarly said the United States remains on an unsustainable fiscal trajectory, especially looking out 30 years into the future.
“The problems that I thought would be my grandkids’ problems,” he said, “are now going to be my kids’ problems.”
