(Bloomberg) -- President Joe Biden unveiled a $6.9 trillion budget proposal on Thursday, a defiant opening salvo in high-stakes negotiations with congressional Republicans over the debt ceiling and government funding.
The proposal, certain to be rejected by the Republican-controlled House of Representatives, showed little inclination for compromise, asking lawmakers to bolster the social safety net through a flurry of new taxes on the wealthy and corporations.
Biden’s proposal would increase funding on a bevy of government programs, extending the solvency of Medicare, lowering prescription drug prices, and cutting the deficit by $3 trillion over the next decade. Even still, the deficit in 2024 would increase from $1.6 trillion to $1.8 trillion, and the gross federal debt would swell to $51 trillion after a decade. In a year that GOP leaders have said they would pursue at least $150 billion in spending cuts and refuse tax increases, Biden instead proposes adding $77 billion across defense and non-defense spending while increasing taxes by $5.5 trillion over the next decade.
The gulf between the parties underscored the truism that presidential budgets are dead-on-arrival wish lists with few practical implications. But this year’s edition – cast against the backdrop of coming legislative battles that could rattle markets and devastate the nation’s fragile post-pandemic recovery – carried outsized importance as a marker of how the White House would approach the coming battles.
White House aides were eager to contrast the president’s vision with congressional Republicans, whose own proposal, to be unveiled this spring, is expected to include deep cuts to federal programs, including health care subsidies and benefits for the poor.
But the approach is a gamble for the president. Federal Reserve Chairman Jerome Powell on Wednesday warned lawmakers of the risk of “extraordinarily adverse” consequences if they fail to raise the $31.4 trillion debt ceiling this summer.
Critics are sure to seize on Biden’s decision to recycle policy programs – and claim deficit savings through tax hikes – that failed to win over even some Democrats during the previous two years. And by offering few pathways for good-faith negotiation, Biden heightens the risk of a government shutdown when funding runs out on Oct. 1.
Here are some key takeaways:
Taxes
A bevy of tax increases are at the heart of what the White House is pitching as a $3 trillion reduction plan.
Biden proposes nearly doubling the capital-gains rate for those making at least $1 million, a 25% minimum tax on billionaires, and creating a new top income tax bracket at 39.6% for those making over $400,000. The president also wants to hike the corporate tax rate from 21% to 28%, end Medicare and retirement tax loopholes used by the wealthy, and eliminate breaks for real estate investors and oil and gas industries.
The tax plans have little chance of passing. Biden had to pare back a scaled-down version of the proposal to win the support of Democratic senators for his climate and inflation legislation last year.
2024
Biden’s budget is heavy on proposals the White House believes enjoy wide bipartisan support, and that can serve as a platform for his coming reelection bid.
Leading the charge are a slew of proposed changes to how the government could negotiate and limit the price of prescription drugs, which the administration estimates could save more than $200 billion over the next decade. Biden’s proposal would cap insulin prescriptions at $35 per month for all Americans, and cap the cost of certain generic drugs, like those used to treat hypertension and high cholesterol, to $2 per prescription per month.
Biden also calls for federal funding for free preschool for the nation’s 4-year-olds, as well as a 10.5% increase for existing early care programs and a 9% bump for Head Start. Biden also seeks to boost federal programs with bipartisan appeal, asking for billions more for cancer research and funding to hire 350 more border patrol agents.
Underscoring Biden’s stance opposing defunding the police, the budget calls for a 66% increase in police hiring grants.
Economic Assumptions
The Biden administration is expecting inflation to continue its deceleration path to end 2023 at 4.3%—from a current annual rate of 6.4%. The projection is largely in line with the median forecast from economists compiled by Bloomberg, a major change from last year’s release, when the White House came under scrutiny for publishing outdated economic estimates.
Biden’s economic team also sees the US economy expanding at 0.6% in real terms in 2023, in line with estimates from both Wall Street economists and the Federal Reserve. The administration, which has capitalized on the strength of the labor market in an effort to showcase a thriving economy, sees the unemployment rate ending 2023 at 4.3% from a more than five-decade low of 3.4%.
Lowering Costs
While this iteration lacks some of the sweeping new programs Biden proposed in his first budget, the White House does propose boosting funding for programs it says would help Americans handle rising costs in the era of inflation. The request includes $59 billion for affordable housing, and proposes expanding Pell Grants for low-income college students by $500. Biden would boost funding for free school lunches, home energy and water assistance, and health care subsidies.
Biden also asks Congress to renew an expanded child tax credit, which expired last year, of up to $3,600 per child, earning plaudits from progressive lawmakers. Biden will unveil the plan at a workforce training facility in Philadelphia, and the budget includes funding bumps for manufacturing institutes and apprenticeship programs.
Medicare and Social Security
Biden’s budget envisions extending a key Medicare program for another quarter century, largely by increasing taxes on those making over $400,000 per year. Republicans have vowed they wouldn’t touch the program, but Biden has sought to highlight past GOP efforts to overhaul entitlement programs by reducing eligibility or benefits.
Interestingly, Biden opted against a proposal offered by some Democratic lawmakers that would impose Social Security payroll taxes on wealthier Americans. Currently, income over $160,200 isn’t taxed for the program. Budget Director Shalanda Young said the decision was intended to signal that changing the program was “not on the table.”
Republican Response
House Speaker Kevin McCarthy told reporters the House budget plan will be delayed because Biden’s budget was a month late and Republicans need to analyze it. But on Wednesday, he flatly ruled out Biden’s proposed tax increases.
“I do not believe raising taxes is the answer,” he said.
Republicans are seeking to balance the budget within ten years, a feat that would likely require some $20 trillion in spending cuts if no taxes are increased. McCarthy has said he would not back cuts to Medicare and Social Security. That means the cuts would focus on the domestic discretionary budget that covers everything from cancer research to Head Start. It will also look for savings by cutting Medicaid, food stamps and other anti-poverty programs.
Defense
The White House’s proposed $842 billion Pentagon-only request is the largest defense budget in the post-Vietnam era excluding costs of the wars in Iraq and Afghanistan, a 3.2% increase over the $816 billion that Congress appropriated this year.
The Pentagon request includes $170 billion in procurement spending and $145 billion for research and development as the US looks to regain the technological edge that lawmakers and experts have lamented it has lost to China’s own ambitious defense build-out.
The White House said it wanted to speed up development of what it calls “uncrewed combat aircraft” — drones that serve as wingmen for piloted planes. Air Force Secretary Frank Kendall this week disclosed the service will request funds to buy up to 1,000 of the craft.
It also “invests in key technologies and sectors of the U.S. industrial base such as microelectronics, submarine construction, munitions production, and biomanufacturing,” said the release.
The administration’s overall national security request — which includes the Energy Department and other agencies — totals $886 billion.
