Update 537 — Biden’s FY22 Budget Plan:
Rx for Recovery, Rebalancing of Economy
Last week, President Biden released his FY2022 budget proposal, calling for $6 trillion in government funding next fiscal year. After ten years of restrictive budget caps and four years of across the board cuts to domestic spending by the Trump administration, Biden is proposing a comprehensive reversal of fiscal policy priorities.
The budget would increase non defense discretionary spending by 16 percent. A budget increase of this size is needed to ensure a durable and robust recovery. To secure it, unity among Democrats will be needed to enable enactment via reconciliation.
Below, we evaluate Biden’s budget priorities, the key economic assumptions and projections it makes, and the circumnavigation ahead in the FY2022 budget process.
Good weekends all,
The Basics of Biden’s Budget
President Biden’s FY2022 budget request formally outlines the White House’s ambitious economic agenda. If enacted, it would bring federal spending close to $6 trillion for FY2022, up from a baseline estimate of $5.7 trillion. Two of the largest components of this budget request, the American Families Plan ($1.7 trillion) and the American Jobs Plan ($2.6 trillion) are paired with $3.6 trillion in revenue offsets, making them fully paid for over 15 years. The packages are categorized under mandatory spending, with the costs spread out over 10 years.
Biden is asking Congress for $1.52 trillion in discretionary spending, an increase of $118 billion (8.4 percent) from last year. Of this increase, $106 billion is directed toward domestic programs. The Department of Defense will only see a $12 billion increase from last year — a major reversal of spending priorities from the Trump era, when budget requests for increased military spending outstripped non-defense programs. The budget includes big increases for crucial domestic programs such as Pell Grants, child care block grants, and housing vouchers.
Source: Government Executive, OMB
Biden’s first budget comes after 10 years of statutory spending caps set by the 2011 Budget Control Act. The law established limits on discretionary spending that expired in FY2021, resulting from a deal struck between President Obama and Congressional Republicans to end the 2011 debt limit crisis. Biden’s budget closes the book on a decade of austerity politics.
Major Spending; Modest Projections?
In the short term, Biden’s budget projects a strong economy. The budget forecasts GDP growing by 5.2 percent in calendar year 2021, inflation holding steady at around two percent, and unemployment dropping to 4.1 percent in 2022. But Biden’s assumptions about how the economy will perform in the long run are grounded in legislative and economic caution.
Over the next decade, the budget projects an average annual growth rate of 2.2 percent. That figure is lower than the 2.3 percent growth rate from 2010-19. This modest long-term projection may be partly due to expected economic impacts of the AJP and AFP not being factored into the budget’s assumptions. Biden and his team may be trying to temper expectations and avoid unrealistic predictions like his predecessor touted. But this modest projection may open the door to questions about the need for major spending proposals if they do not boost long-term growth.
The potential macroeconomic consequences of AJP and AFP should not be understated, Both plans meaningfully boost the nation’s long-term economic growth. The AJP increases infrastructure investment by over one percent of GDP over the next decade. Moody’s Analytics estimates that the multiplier effect of such federal spending in current conditions is a whopping 1.5 higher than returns on both corporate and payroll tax cuts. With over three million workers permanently unemployed due to the pandemic, an infrastructure plan would be “particularly effective” in achieving sustainable and equitable growth. Biden’s AFP invests $1.1 trillion in working families ($900 billion in the form of tax credits) and would bring baseline GDP up $100 billion by 2030 and create 840,000 additional jobs along with greater labor participation.
Fiscal Deadlines and Legislative Challenges
Presidential budgets are typically considered “dead on arrival” in Congress. Government funding bills for FY2022 must be passed by September 30 to avoid a shutdown. Republican opposition to the proposed spending increases will be a roadblock in the Senate, meaning a short-term stopgap bill before the end of the fiscal year is likely.
The budget process will also be affected by Biden’s proposed infrastructure plans.
- Democrats will likely use reconciliation to pass some or all of the American Jobs and Families plans. Thus, the Budget committees will need to include reconciliation instructions in the FY2022 budget resolution. A recent ruling by the Senate parliamentarian effectively limits Democrats to only using the FY2022 budget process to pass the infrastructure package via reconciliation. So the Budget committees will have to wait to draft the budget resolution until it becomes clear how much room for new spending will need to be included in the reconciliation instructions.
- In the House, Budget Chair Yarmuth has indicated that he will advance a “deeming resolution” next week, allowing the appropriations process to begin. The Appropriations subcommittees will begin marking up their bills later this month. The bills are expected to advance to the floor by July 4 and receive a full chamber vote before the August recess.
- In the Senate, consequential decisions will be made about the path to enactment. A spending subject to the filibuster could mean leaving out some of the ambitious spending increases proposed by Biden. The likeliest outcome will be a short-term continuing resolution to avoid a shutdown. Appropriations Committee Ranking Member Shelby told reporters that he expects a “long, hard winter” in which multiple stopgap bills will be necessary.
Don’t Negotiate on the Debt Limit
Meanwhile, Congress will also need to address the debt limit. In 2019, Congress passed a two-year suspension of the debt limit, which will expire on July 31. At some point this fall, the U.S. will hit the debt limit, requiring Congress to either suspend or raise it to avoid a catastrophic default scenario. Congress could attach debt limit legislation to a must-pass spending package, but the outcome of this would depend on the willingness of Senate Republicans to play hardball as they did in 2011. Very few members would vote for a standalone debt limit bill.
Democrats could also raise (but not suspend) the debt limit using reconciliation. Doing so would avoid Republican obstructionism but has political pitfalls. Reconciliation has been used only four times — last in 1997 — to raise the debt limit. Democrats declined to include a debt limit increase in the $1.9T reconciliation package earlier this year to avoid exposing moderate members to a tough vote, since that legislation would have to specify a multi-trillion dollar increase. Democrats may want to avoid raising the debt ceiling unilaterally and force Republicans to supply votes to avoid a default. Using reconciliation may be the preferable course, as it would prevent Democrats from having to give up anything significant in order to get Republican votes.
Standing Firm on the Budget
Biden’s budget will not survive the treacherous appropriations process intact, but Democrats must stand firmly behind the core principles that inform the proposal. Biden has a unique — but likely fleeting — opportunity to change the relationship between the government and the economy in the short and long term. Allowing Republicans to run out the clock with prolonged negotiations over infrastructure is counterproductive, especially when Democrats have more leverage as the majority party. Biden’s spending proposals are ambitious, but if Democrats have the courage of their convictions and stay united, they can bring these proposals to fruition and reform the economic landscape.