Biden thinks economy will crush high deficit problem – 24/7 Wall St.

It is one of the oldest stories in the history of the American federal budget. High deficits are reduced by a better economy. Improvements in gross domestic product and the right tax mix will boost federal revenues. President Biden said as much when unveiling his own new budget:

My administration is on track to reduce the federal deficit by more than $1.3 trillion this year, halving the deficit from the previous administration’s last year and achieving the largest one-year deficit reduction in US history achieve. This is a direct result of my government’s strategy to bring the pandemic under control and move the economy bottom-up, middle-out.

If only it could be that easy. History says it is not so. Biden hopes to raise taxes on people making more than $100 million a year and some businesses. Both groups have a long track record of finding ways to reduce these burdens.

The government expects GDP to increase to $25.6 trillion in fiscal 2023 from $22.4 trillion in fiscal 2021. This assumes, of course, that inflation will not trigger a material slowdown in consumer spending, which has often been a major cause of recessions. Another assumption is that the deficit as a percentage of GDP will decrease from 12.4% in 2021 to 4.5% in 2023. A movement of this magnitude may not be unprecedented, but it must be extremely rare. While a drop in spending is an important part of the budget bill, so is an extraordinary increase in federal revenue, mostly from taxes. It is forecast to grow from just over $4.0 trillion in 2021 to over $4.6 trillion in 2023.

At this moment, the near-term economic future is more in question than it has been in most years. This is partly due to problems in the global economy, largely due to the Russian invasion of Ukraine. This could mess up the world’s financial future for months, if not longer, as it further stalls the global supply chain, particularly for oil, gasoline and grains. Is Biden right? No matter how many people he employs in the Office of Management and Budget, no one can know.

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