Introduction

This past May, President Biden released his proposed budget plan for Fiscal Year 2022 (FY2022). The budget differs from budget plans in previous years in several notable ways. Itt proposes a temporary 15.5% increase in spending on non-emergency, non-defense appropriations—also known as non-defense discretionary (NDD)—which includes a wide array of services such as:

• Education 
• Job training
• Medical care for veterans (the largest program under NDD spending)
• Scientific and medical research
• Public health measures, particularly in the context of COVID-19
• Treatment for substance abuse disorders
• Housing and other assistance for families in need
• National parks
• Weather forecasting
• The Coast Guard
• International assistance
• Air traffic control
• Rural development 
• Upgrades to wastewater and drinking water treatment

This is a proposed increase in the NDD level excluding emergency funding distributed to address the pandemic, such as the American Rescue Plan Act enacted earlier this year. The FY2022 budget plan does not propose any further spending on emergency services. 

This significant growth in NDD spending follows the recent expiration of the 2011 Budget Control Act, which capped the amounts spent on both NDD and Defense appropriations through FY2021. Due to the act’s stringent legal limits on the levels of both discretionary and non-discretionary spending, the only NDD category that saw an increase in appropriations through this decade was veteran’s medical care. Spending in this particular category was raised because of rising costs of healthcare and pre-existing shortcomings in the quality of healthcare available to veterans. More spending in veteran’s medical care led to tighter constraints for other NDD categories. The act caused 2021 NDD funding to be about 10% below what it was in 2011 once adjusted for inflation and population growth.

Overall, Biden’s new plan, free from the limit imposed by the Budget Control Act, focuses on using federal funds to begin addressing the racial and wealth inequalities currently present in the U.S. His administration plans to do this through the American Families Plan which substantially increases funding to education, child care, and housing assistance. The budget aims to foster equity in elementary and secondary school education, increase financial aid for college students, strengthen the public health system, meet healthcare obligations to tribal nations, address mental health and substance abuse, and make housing assistance and legal services for low-income people more accessible.

The budget also reflects significant reinvestment into critical institutions by increasing spending on federal research and development through the Center for Disease Control and Prevention and the Department of Health and Human Services. It also raises spending on environmental protection, reversing a decade of environmental funding cuts, particularly from President Trump’s presidency. It increased operating funds awarded to various agencies so that they could manage Social Security benefits, administer tax laws, and enforce laws that protect civil rights, labor standards, and workplace health and safety. 

Effect on GDP and the Deficit

The Biden Administration estimates debt will grow to 117%  of Gross Domestic Product (GDP) by the end of FY2031. In nominal dollars, this means the current debt of $22 trillion would reach $39 trillion. The increase in debt is due to the higher projected spending percentage of GDP relative to the revenue percentage. At present, the budget plan’s spending is 24.5% of GDP, while revenue is 19.3% of GDP. The percentages are higher than the 50-year averages of 20.6% of GDP for spending and 17.3% of GDP for revenue. Federal deficits would also rise to nearly $1.6 trillion over the next decade. However, Biden’s administration has announced plans to finance this deficit by gradually raising taxes for corporations and individuals with incomes over $400,000. In addition, the administration will continue to allow tax cuts for low to middle income earners that were originally put in place by the Trump administration. 

Skeptics of the sustainability of Biden’s budget plan also cite his administration’s own low predictions for GDP growth despite tremendous investments in the nation. After accounting for inflation, the administration predicts the economy will grow about 2% a year—equal to  the average rate of growth over the past 20 years. To this, Biden has said that current low interest rates and our unique position post-recession is the ideal time to invest in the nation. If his plan is approved, the government would be spending almost 25% of the U.S. output every year and would be collecting almost 20% of the total economy in tax revenue.  

Committee for a Responsible Federal Budget and the Tax Foundation Analysis

The Committee for a Responsible Federal Budget is one such skeptic of the proposed budget plan. Their analysis concludes that the budget adds an unsustainable amount of debt over the next ten years while doing nothing to address high and rising debt in the long term. The Tax Foundation’s General Equilibrium Model echoes these concerns and further estimates that the budget plan will reduce GDP by 0.9%, and Gross National Product (GNP) by 1%, and also lead to 165,000 fewer jobs over time. Some of the primary contributors to these estimates are:

• the increase in corporate income tax from 21% to 28%; 
• the 15% minimum corporate book income tax—which places a 15% minimum tax on the adjusted financial incomes of large corporations; 
• raising capital gains rates; 
• the increasing pass-through business income taxes, which increases taxes for businesses that are not subject to corporate income taxes. 

The foundation estimates that the fall in GDP caused by the higher corporate taxes will offset any increase in GDP that may result from improved infrastructure and investment. The GNP, which is often used as a measure of American household incomes, is also expected to fall because of increased taxes on savers. However, Biden’s intent to only increase taxes for individuals earning over $400,000 in income and instead expand refundable tax credit programs for low- and middle-income earners indicates this will primarily impact high-income earners and savers. The taxes proposed in the budget support this estimate, and indicate the budget will lead to a 15.9% increase in the after-tax income of the bottom 20% of income earners. The model used by the foundation uses

1. A tax simulator to produce conventional revenue and distributional estimates, 
2. A neoclassical production function to estimate capital stock and people’s responses to policy and how it impacts long-run output, 
3. And a demand function to estimate people’s choices between labor and leisure as well as their choices between saving and consumption. 

All together, the three components produce revenue estimates of tax policy and estimates how policy can impact GDP, wages, employment, and other indicators of economic performance. Similar to the Tax Foundation’s General Equilibrium model, the University of Pennsylvania’s Penn Wharton Budget Model looks more at the long-run effects up to 2050. This model predicts that the budget plan will result in a 7.3% decrease of public debt from what it is today. Overall, however, it estimates a 1.1% fall in GDP between now and 2050. 

The Economic Policy Institute Analysis

The Economic Policy Institute (EPI) offers an alternative analysis, stating that Biden’s budget plan would have a host of positive effects if spending proposals not funded by increased taxes could be financed with debt. Their analysis indicates that the budget would result in an unemployment rate of 4.1% or lower over the 10 year period, reduced inequality through higher corporate taxes and better distribution of the benefits of economic growth, and a historically low public debt burden. This impact on equity is more difficult to measure and often is not easily translated into economic measures of success, which the EPI takes into consideration with their analysis. They further state that the Federal Reserve is not able to recover from recessions as quickly or efficiently as policymakers believe. A factor in this observation is the almost zero interest rate, which means it wouldn’t be sustainable to cut interest rates further, and subsequently indicating that fiscal policy can and should be a key contributor to economic recovery. Particularly given that this budget increases government spending and progressive taxes, it has the potential to be expansionary. The potential comes from its plan to make the budget deficit-increasing in the short term and deficit-decreasing in the long term. In addition, the budget entails a large growth in capital income taxes, which can reduce commuting time and increase quality of education when redistributed, ultimately making the economic growth more equitable. Finally, the EPI asserts that using the ratio of public debt to GDP is not an effective measure of fiscal burden because it is entirely retrospective and it divides a static stock measure—debt in a snapshot of time—by an income flow (meaning GDP) . It provides information about past budget deficits and does not take current policy into account. Using this retrospective measure as an indicator of budget success does not show the impact on equity.    

Conclusion

Biden’s many goals coupled with the expiration of the 2011 Budget Control Act have resulted in unique deviances from past budget plans, including an increase in NDD spending relative to defense spending. His budget plan has also begun to center equity and reparations through education, public health, and housing assistance. However, the increase in funding required to further these goals have been called unsustainable by some and necessary by others.