Biden claims he has reduced the deficit, but the math doesn’t add up.
Biden claims he has reduced the deficit, but the math doesn’t add up.
L ast week, I released the 2022 edition of my annual book of charts examining the federal budget, spending, taxes, and deficits. The 128-page book uses publicly available data from leading government sources to shatter much of the conventional wisdom on economics. And although the Congressional Budget Office has not updated its budget estimates since May, my chart book incorporates all subsequent legislation to create an up-to-date look at escalating deficits. The entire chart book is available here, and seven charts are highlighted below.
1.) Escalating Deficits Under President Biden
President Biden has been bragging that he “reduced the deficit by a record $1.4 trillion.” But this is grossly misleading. When the president was inaugurated, CBO projected that the scheduled expiration of pandemic spending would automatically reduce deficits to $2.3 trillion in 2021 and then $1.1 trillion in 2022. Instead, the president ran deficits of $2.8 trillion and $1.4 trillion, respectively — a cumulative $800 billion higher than projected. Most absurdly, the president pushed up the 2021 deficit with the American Rescue Plan and then took credit for “deficit reduction” when his own spending expired. This is like someone demanding credit for putting out a fire that he started.
Overall, since Biden took office, he has enacted legislation and executive actions that will cost Americans a net total of $4.8 trillion over the coming decade. After incorporating economic and technical revisions, the 2021-2031 projected deficit is up by $3.8 trillion since Inauguration Day.
2.) Why We Have Budget Deficits
Back in 2000, Washington famously ran a 2.3 percent of GDP ($236 billion) budget surplus. In 2022, the Federal government ran a 5.6 percent of GDP deficit ($1,375 billion). What went wrong?
This may surprise those who focus on legislation and assume that tax cuts have driven rising budget deficits. However, much of the tax cuts merely canceled out the tax code’s “real bracket creep” that automatically raises average tax rates over time. Moreover, entitlement growth goes unnoticed because it occurs automatically in the baseline with no congressional vote. Additional entitlements were created as well, such as providing Medicare prescription drugs and a student-loan bailout.
That said, comparing 2000 and 2022 revenues is not fully representative because both years had anomalously high tax revenues. Overall, average federal tax revenues since 2000 have been 1 percent of GDP lower than in the prior two decades, which is more than the snapshot of these two years. Nevertheless, entitlement-cost growth has undoubtedly been the largest contributor to the growth in budget deficits.
3.) The Terrifying Budget Outlook
This chart provides the clearest picture of Washington’s long-term budget outlook. The black line shows tax revenues — averaging 17 percent of GDP since 1960 — gradually rising to 19 percent of GDP over the next three decades. Yet this revenue growth cannot keep pace with federal spending leaping from a post-1960 average of 20 percent of GDP up to 31 percent of GDP. The driver of this spending surge is clearly the soaring cost of Social Security and health entitlements, as well as the interest costs of putting those entitlement shortfalls on the national credit card.
By the way, this CBO projection is the rosy scenario that assumes no new spending expansions, the scheduled expiration of the 2017 tax cuts, no major wars or national emergencies, and low interest rates. Actual deficits will likely be even larger.
4.) Social Security and Medicare Drive Long-Term Deficits
The CBO projects a staggering $114 trillion baseline budget deficit over the next three decades — pushing the national debt up to 185 percent of GDP. And the cause of these deepening budget shortfalls is no mystery. Over these decades, the Social Security and Medicare systems will collect $88 trillion in payroll taxes and other revenues, and cost $204 trillion (consisting of $158 trillion in benefits, and $46 trillion in interest costs directly attributed to these shortfalls). And no, saving the $3 trillion Social Security Trust Fund for future benefits instead of raiding it would not have closed much of this $114 trillion budget gap.
By 2052, the Social Security and Medicare systems will be running an annual deficit of 13 percent of GDP. The rest of the federal budget projects to balance over the next three decades. Virtually the entire long-term fiscal decline is driven by those two federal programs.
5.) The “Easy” Deficit Solutions Do Not Add Up
When faced with a $114 trillion budget shortfall over three decades, progressives often suggest simply taxing the rich or cutting defense spending. But the math does not add up. Fully financing Social Security and Medicare would require closing a combined programmatic budget gap that rises to 6 percent of GDP by the 2040s (which would in turn eliminate a projected 7 percent of GDP of interest costs, since the debt would stabilize).
The tax menu below shows that it is virtually impossible to raise 6 percent of GDP from taxing the rich and cutting defense. Instead, lawmakers would have to target the middle class with income, payroll, and/or value-added taxes much like Europe already does. Better yet, lawmakers could reform the actual Social Security and Medicare systems driving the deficits.
6.) Yes, the Rich Pay More Taxes
A common misconception suggests that secretaries pay higher tax rates than the executives they assist. While anecdotes will always exist, average federal tax rates continue to rise with income. In fact, the highest-earning 20 percent of taxpayers pay 70 percent of all federal taxes, including 91 percent of all income taxes, despite earning only 59 percent of the total income. Overall, the U.S. has the most progressive tax code of all OECD nations.
7.) Comparing Presidential Fiscal Records
The final 16 charts compare the fiscal records of Presidents (George W.) Bush, Obama, and Trump. These data are based on earlier reports tabulating the fiscal record of each president. The summary chart below shows that the ten-year cost of all enacted legislation and executive orders totaled $6.9 trillion for President Bush, $5.0 trillion for President Obama, and $7.8 trillion for President Trump (enacted in just one term, compared to two for his predecessors). In addition, economic factors and technical revisions largely out of a president’s control added $3.4 trillion to Bush’s deficits and saved $3.9 trillion for Trump over a decade.
Of course, this accounting leaves out important context such as congressional control, pandemics, wars, and recessions. Additional charts and underlying reports address how those factors affected these spending figures.
The full chart book is available here.