President Joe Biden has recently proposed a $6 trillion budget designed to make the US more competitive.
Spending is already on an unsustainable trajectory so we need to examine the impact this budget proposal will have on the fiscal outlook of the country.
A lot of people believe a $6 trillion budget is too much, too soon and will exacerbate the debt problem in the long run.
The budget proposal introduces budget deficits over the next several years, financed mainly by additional debt. This will result in over $15 trillion in additional debt by the end of the decade resulting in a national debt of roughly $42 trillion by 2030.
The assumption being made is that this level of debt is sustainable because of the belief that interest rates will stay relatively low. Should that assumption not hold true, this level of debt will cause some major issues for the US economy.
The stated goal of the budget is to help Americans attain a middle class lifestyle and to make the US more competitive globally.
The proposal hasn’t been voted on yet.
The budget focuses on infrastructure projects, as well as shoring up of social programs like affordable childcare, universal Pre-K education, and a national paid leave program.
Joe Biden campaigned on the promise that middle income earners will not have to pay for this additional spending. Biden plans to raise taxes on corporations and high-income earners and expects his plan to be offset by those additional taxes over the next fifteen years.
The debt continues to grow each year because of the unfunded liabilities within existing social programs like social security. The budget proposal does not address this.
It’s important to note that the proposed budget allows the middle income tax cuts that Trump signed into law to expire. There are sources in the White House that say that Biden will address these tax cuts at some point in the future.
By 2024, debt as a share of the economy would rise to its highest level in American history, eclipsing a World War II-era record.
Another worry is that the new level of spending will become the new normal going into the future.
Joe Biden believes that this additional spending can be financed by an economy that is growing by just under 2% per year.
We also need to be concerned about inflation. As businesses recover from Covid, people are making money again but that money is chasing fewer goods and causing prices to rise. Additional spending by the government will further increase the money supply and accelerate the inflation.
If you had any doubt that tax rates will not be dramatically higher down the road than they are today, this budget calls for it. By 2030 there will be so much debt the government will be forced to broaden the tax base.
Experts are no longer talking about passing the debt onto the next generation. More of them are talking about how the current generation will have to pay for it. If you have money in a 401(k) or IRA the government’s crosshairs are focused on your accounts.
We need to keep an eye on the fiscal trajectory of the country because that’s a barometer for where tax rates are going to be over the course of the next 10 years.
Mentioned in this Episode:
Biden’s Plan: President to Propose $6 Trillion Budget to Boost Middle Class, Infrastructure – https://www.nytimes.com/2021/05/27/business/economy/biden-plan.html