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The Biden administration said Friday that the federal deficit was cut in half from a year earlier, as Washington prepares for new battles over taxes and spending with rising interest rates and expected that Republicans win back at least one branch of Congress in the midterm elections.
In a statement, the Treasury Department and the White House Office of Management and Budget said the annual deficit was cut from $2.8 trillion in 2021 to about $1.4 trillion in 2022, a decline driven primarily by the expiration of trillions in pandemic-era emergency spending. The gap between revenue and spending also narrowed in part due to stronger-than-expected tax revenues, as the booming U.S. economy and strong corporate profits helped bring additional funds to the federal coffers.
“The federal deficit went up every year in the Trump administration, every year he was president,” President Biden told reporters, criticizing the 2017 GOP tax bill that added more than $1.5 trillion dollars to the deficit. “From my perspective, things have been different: The deficit has been reduced in the two years I’ve been in office, and I’ve just signed legislation that will reduce it even further in the coming decades.”
On October 21, President Biden celebrated the $1.4 trillion drop in the federal deficit seen in 2022, the largest one-year drop in U.S. history. (Video: The Washington Post)
Biden also criticized congressional Republicans for pushing to extend Trump’s tax cuts, arguing that the move would dramatically increase federal deficits. He accused the GOP of pushing for cuts to Social Security, even though Republicans have said their proposed changes to Social Security would not reduce benefit amounts. And he criticized his opponents’ push to repeal key parts of the Inflation Reduction Act, his signature economic law passed over the summer.
“If the Republicans get their way, the deficit will go up, the burden will fall on the middle class … They’re not going to stop there,” Biden said. “It’s MAGA-mega dripping.”
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The new deficit estimate, hotly anticipated by budget analysts, could help set the stage for further fights on Capitol Hill over taxes and revenue. GOP leaders have suggested in recent days that if they gain more power in Congress next year, they may be willing to use a government shutdown or a breach of the federal debt limit to demand spending cuts. That could lead to a repeat of the battles during the Obama administration, when lawmakers came close to triggering a global economic calamity by defaulting on U.S. loan obligations.
Although Biden is eager to tout the reduced deficit, conservatives point out that it was down from last year in large part because of the end of the big spending programs he passed.
“It’s terribly disingenuous for the White House to take credit for reducing the deficit simply because temporary pandemic spending expired on schedule,” said Brian Riedl, a senior fellow at the Manhattan Institute, a libertarian-leaning think tank, and a former economist at head of Sen. Rob Portman (R-Ohio). “Especially when they had helped increase the deficit with the American Rescue Plan.”
Deficit debates will intensify further with rising interest rates, which dramatically increase the cost of federal borrowing. The Federal Reserve has raised interest rates significantly as part of its battle against inflation and is expected to continue this campaign for the foreseeable future. That could add trillions to the cost of taking on the debt, said Marc Goldwein, senior vice president for policy at the Committee for a Responsible Federal Budget, a think tank that pushes for lower deficits.
The Congressional Budget Office, the nonpartisan budget scorekeeper of Congress, has said that interest payments on the debt alone could reach $1 trillion a year, about double their current amount. by 2030, and that number doesn’t take into account the Fed’s recent rate hikes. Each one-point increase in expected interest rates translates into $2.4 trillion in additional debt over a decade, Goldwein said.
“This increases the political cost of making the deficit worse,” Goldwein said. “The loans we’re making now and the loans we’re making in the coming years will bite into higher interest rate debt.”
The response to these rising costs, however, is likely to divide lawmakers in Washington.
White House officials have repeatedly criticized Republicans this week for wanting to change Social Security and Medicare. GOP officials have denied they intend to cut benefits, but said they want to ensure the long-term fiscal solvency of entitlement programs. Republican lawmakers are also weighing whether to try to cut clean energy spending in Biden’s signature Inflation Reduction Act aimed at fighting climate change, according to Stephen Moore, a former economic adviser to President Donald Trump who is in touch with the GOP leaders. Democrats would fiercely resist such measures, which many experts believe are necessary in the fight against climate change.
“What I’ve been telling congressional leaders is that the most important thing is to reduce spending as much as possible,” Moore said. “The deadly new virus is out-of-control spending. They need to take an ax to the budget.”
Biden has touted the Inflation Reduction Act to reduce the deficit by nearly $2 trillion over two decades, according to the Committee for a Responsible Federal Budget. But deficit hawks have criticized him for writing off what the Congressional Budget Office has estimated is roughly $400 billion in student debt payments.
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Still, some economists have warned of the economic danger of cutting public spending at the same time as the central bank raises rates, two forces holding back growth.
“We have already had big cuts in the deficit. “If you make them even sharper at a time when the Fed is already contracting the economy, that’s going to be really damaging,” said Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank. If you want to throw the economy into a recession, combining big rate hikes with big spending cuts pretty much guarantees it.”