There was much excitement in the markets yesterday when the NYT leaked that Biden will propose a $6 trillion budget on Friday. Only… as Goldman’s Alec Phillips explains, the recent headlines around US infrastructure spending and the overall federal budget are vastly overblown and do not represent nearly as much incremental spending as they appear.
For one thing, here is the $6 trillion number in its proper context: according to Goldman, even if Congress makes no further policy changes this year, the federal government is on track to spend $5.6 trillion in fiscal 2022.
Or consider that the latest Senate Republican “compromise” offer of a “1 trillion” (really $928BN) infrastructure proposal counts already-projected spending (i.e., over the next 8 years, the Congressional Budget Office projects highway spending of $400bn and transit spending of $95bn. Senate Republicans propose $506bn and $98bn respectively, an increase of $109bn in those two categories combined) leaving new spending in the proposal at a fraction of what the White House proposes: in total, the Senate Republican proposal amounts to less than $300bn in new spending. By contrast, all of Biden’s $1.7 trillion proposal is new spending, which leaves the two proposals well over $1 trillion apart.
Here are the full details behind all those big numbers being thrown about, courtesy of Goldman:
Bipartisan infrastructure talks haven’t come very far. The latest Republican proposal on infrastructure has been reported as “$1 trillion”, which at first glance would put it more than halfway to President Biden’s $1.7 trillion proposal. However, the gap between the proposals is much wider than it might seem. The figures in the proposal sum to $928bn, rather than $1 trillion. More importantly, most of that amount reflects spending that is already projected to occur without policy changes. For example, over the next 8 years, the Congressional Budget Office projects highway spending of $400bn and transit spending of $95bn. Senate Republicans propose $506bn and $98bn respectively, an increase of $109bn in those two categories combined. The other areas of spending in the proposal face similar issues, such that the Senate Republican proposal appears to amount to less than $300bn in new spending. By contrast, all of President Biden’s $1.7 trillion proposal is new spending, which leaves the two proposals well over $1 trillion apart.
Headlines that the White House will propose $6 trillion in spending are less surprising than they might sound. This spending level appears to simply reflect the cumulative effect of what President Biden has already laid out, rather than new proposals. The CBO baseline for federal spending in FY2022 is $5.05 trillion. However, this projection was published prior to enactment of the American Rescue Plan (ARP), which adds $529bn to the deficit in FY2022. The baseline for the President’s proposal is therefore around $5.6 trillion in FY2022. The White House already sent a request to Congress for $118bn in additional discretionary spending, which would take total spending in FY2022 to around $5.7 trillion. The remaining $300bn or so likely reflects the effect of the roughly $4.4 trillion in spending the President has proposed in his American Jobs Plan and American Families Plan.
Friday’s budget releases will nevertheless include important information. Although the White House budget looks unlikely to include substantial new fiscal proposals beyond what the President has already outlined, it should provide detail on the expected timing of spending under those proposals; we expect that it will take 2-3 years for several of the new programs the President proposes to reach their run-rate. Markets are also likely to pay attention to the tax proposals, known as the “Green Book”, that the Treasury is likely to release around the time the White House releases the budget. One area of interest will be the effective date of tax proposals: Goldman expects that the Treasury will propose to make most of the tax increases effective January 1, 2022, but the capital gains rate could be proposed to take effect during 2021.
Congress will make many changes to whatever the White House proposes. Democratic control of the House and Senate and an active fiscal policy agenda makes the President’s Budget more important than such budget submissions usually are. Even so, these proposals represent a menu of options that Congress will consider, and many are likely to be modified or omitted entirely from the legislation that Congress ultimately passes. Goldman expects that Congress will pass slightly more than $3 trillion over ten years in new spending and tax breaks, financed by around half as much in tax increases (mainly on corporate and capital gains income).
The budget will be released at 1:30pm. Traditionally, the Treasury’s Green Book follows shortly after the White House budget. The timing of this release itself has significance. The White House has decided to release what is arguably the most important policy document of the year on a Friday afternoon before a 3-day weekend at the start of a congressional recess, when it is likely to receive little attention, rather than the traditional Monday morning release when Congress is in session.