With inflation running hot and the economy cooling, West Virginia Sen.
doesn’t need another reason to oppose a big tax hike-and-spending bill. But the Congressional Budget Office has given him one anyway, with its updated budget outlook that is even bleaker than its forecast last summer.
The good news is that tax revenues are booming. CBO projects that revenue this year will rise to 19.6% of GDP, the highest since 2000, and average 18.1% of the economy over the next decade. Higher tax revenue projections will shave $2.1 trillion off the deficit over 10 years. We don’t need to raise taxes to reduce the deficit.
Inflation has been good for government coffers, driving more Americans into higher income-tax brackets. Surging asset prices have also increased capital gains. Corporate tax revenue is also exceeding CBO’s estimates before the 2017 corporate tax reform, which caused more companies to repatriate overseas earnings and return the money to workers and shareholders.
Alas, higher spending will more than offset all of the revenue windfall. Recall how Members of Congress claimed their $1 trillion infrastructure bill would be “fully paid for”? CBO now says the bill will cost $678 billion more in outlays than its estimate last summer, as higher spending on public works over the next few years will be baked into the budget baseline.
Congress’s omnibus appropriations bill this year was supposed to increase spending by a mere $88 billion. But CBO projects that higher discretionary and emergency spending will also get rolled into future years and add $1.1 trillion to the 10-year deficit. Increased borrowing to pay for this extra spending will cost another $245 billion.
The Biden Administration has also spent hundreds of billions of dollars that Congress never appropriated. Regulatory changes to the food-stamp program and the public-health emergency declaration are projected to increase welfare spending by $315 billion over the next decade—and much more if the Administration keeps extending the emergency.
CBO also projects that enhanced ObamaCare premium subsidies that Democrats enacted as part of their Covid bill last March will cost $144 billion more over the next decade than earlier forecasted. A big reason—no surprise—is that insurers have raised premiums to pocket bigger subsidies. The sweetened subsidies are set to expire at the end of this year, but Democrats want to make them permanent.
What inflation giveth in higher revenue, it also taketh in higher entitlement spending. Inflation adjustments to entitlements are expected to add another $1.3 trillion to the deficit over the next decade—and that’s assuming inflation falls sharply to a mere 4.7% by the end of this year and 2.7% in late 2023.
Rosy-eyed budget gnomes also forecast that the interest rate on the 10-year Treasury will average only 2.4% this year, 2.9% next and 3.5% over the decade. Yield on the 10 year is now 2.7% and may climb a lot higher if inflation doesn’t fall. This will cause debt service to swell as Treasury issues new debt.
Even under CBO’s panglossian assumptions, net interest on the debt will double over the decade to a record 3.3% of GDP. Debt as a share of GDP will grow to 109.6% in 2032—close to the World War II peak—from 97.9% this year. All of this assumes there’s no recession, no student loan write-offs and no big spending bill in the next decade. What are the odds?
The broader point is that the U.S. doesn’t have a revenue problem. It has a domestic spending and entitlement problem. The last thing we need is a tax hike on top of another spending blowout that slows economic growth, grows public debt and makes managing it more difficult.
Mr. Manchin did the country an enormous public service by stopping President Biden’s $4.6 trillion Build Back Better plan. He could do Americans another one by holding the line on new taxes and spending.
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