Biden contradicts himself with victory laps on deficit reduction and student loan relief, experts say
Hours later, Biden defended his student debt cancellation program – a program that completely wipes out the modest deficit savings created by the Inflation Reduction Act.
Biden’s dueling tales have puzzled some budget watchers who remain deeply concerned about America’s mountain of debt.
“It seems contradictory to me,” Dan White, senior director of economic research at Moody’s Analytics, told CNN on Friday. “On the net, the administration’s policies increased the deficit, not reduced it.”
Maya MacGuineas — chair of the Committee for a Responsible Federal Budget, a deficit watch group — said that in addition to the Cut Inflation Act, the Biden administration had made the fiscal situation worse, not better.
“The White House knowingly twists the facts to tell a very different story from a fair and accurate story,” MacGuineas told CNN on Friday.
Asked about the optics of encouraging deficit reduction hours before highlighting the student debt program, MacGuineas was baffled.
“It seems a little insulting to the public,” she said, “like you can trick us into claiming fiscal responsibility – which is not warranted – and separate it from this huge executive order that costs hundreds of euros. billions of dollars.”
The White House did not respond to a request for comment on the criticism.
But David Kelly, chief global strategist at JPMorgan Funds, said the Biden administration deserved credit for a strong economy that helped boost tax revenue.
“The economy has fully recovered from the pandemic. And that’s helping to reduce the deficit,” Kelly said.
The Inflation Reduction Act is expected to reduce the federal deficit by $238 billion over 10 years, according to the Congressional Budget Office. However, most of these savings are expected to be realized within the last decade. And these are relatively small savings compared to the $31 trillion in US debt.
“Two hundred and thirty-eight billion dollars is really a drop in the ocean,” White said.
Either way, Biden’s student debt relief, which will help millions of borrowers, will more than offset those savings. The CBO projects that canceling student debt will increase the deficit by $400 billion.
The good news is that deficits are indeed shrinking – and shrinking faster than many imagined possible. This should reduce the risk of a debt crisis or financial market pressure that forces drastic budget cuts.
The Treasury Department said the annual budget deficit plunged to $1.4 trillion in the fiscal year that ended Sept. 30. This is a massive improvement from the record high of $3.1 trillion in fiscal year 2020.
The bad news is that deficits remain very high, exceeding those in any year except during the peak of Covid and during the Great Recession.
And it is important to understand why the deficit has fallen so sharply. It’s not because the government has put massive spending programs like Social Security or Medicare and Medicaid on a sustainable path. That’s because the Covid emergency spending that drove the deficit to new highs expired. Fortunately, airline bailouts, stimulus checks and repayable loans are in the rearview mirror.
“That’s the only reason,” White of Moody’s said. “If the Biden administration is to take credit for anything, it doesn’t make things any worse than they were.”
The Committee for a Responsible Federal Budget estimates that more than 100% of the deficit reduction for fiscal year 2022 is due to the reduction or expiration of Covid relief. The group estimates that Biden’s actions to date have increased deficits by $4.8 trillion through 2031.
“I’d like to give the White House credit. Unfortunately, their record gives you nothing to cheer about,” MacGuineas said.
Biden correctly noted during his speech on Friday that deficits have been rising throughout the tenure of his predecessor, former President Donald Trump, the self-proclaimed debt king.
“The federal deficit grew every year in the Trump administration, every year he was president,” Biden said. “It increased before the pandemic. It has increased during the pandemic.
These increases didn’t just reflect emergency Covid spending by the controversial tax cuts that failed to live up to the hype.
“Under my watch, things have been different,” Biden said. “The deficit has gone down the two years I have been in power.”
MacGuineas agreed Trump had a “terrible” record on the deficit and yet struggled to say Biden had done a better job on the issue.
“Both, in times of economic strength, continued to borrow in a fiscally reckless manner,” MacGuineas said. “None of them have shown an iota of fiscal responsibility — except for eight days after Biden signed the Cut Inflation Act.”
Looking ahead, US policymakers still face a serious challenge in redressing the fiscal situation.
Kelly, the JPMorgan executive, is encouraged that the debt-to-GDP ratio, a closely watched figure, appears to have peaked, at least for now.
“We are in a better place. But we really need to craft policies in a logical way to meet the real needs of the economy, not just in a way to get votes,” Kelly said. “Both sides are guilty of this.”
MacGuineas is more concerned, pointing to the fact that Uncle Sam’s borrowing costs have risen because the Federal Reserve has raised interest rates sharply to fight inflation.
“This is the moment that we’re all worried about,” MacGuineas said.
White also said the United States remains on an unsustainable fiscal path, especially 30 years from now.
“Issues that I thought were my grandchildren’s issues,” he said, “are now going to be my children’s issues.”