BBB Is a Fiscal Risk
The Biden administration’s Build Back Better (BBB) plan is at a critical stage. A bill has passed in the House and now Senate Democrats must decide what they support and what they don’t. One member of the caucus—Joe Manchin of West Virginia—seems to realize that BBB is both a major revision to social policy and a fiscal plan with long-term implications.
Assessing BBB’s budgetary risks requires context. The plan is being debated after a period of twin economic crises and multiple fiscal response plans. The financial sector crash of 2008 to 2009 forced governments in advanced economies to borrow heavily to avoid an economic downturn that would have been worse without fiscal support. At the end of 2008, the federal government’s outstanding debt was equal to 39.4 percent of GDP. By 2018, it had risen to 79.2 percent of GDP.
Then, in early 2020, there was a (hopefully) once-in-a-century global pandemic. Congress acted quickly and passed multiple response plans to mitigate the economic fallout, at a total cost of $5.7 trillion. At the end of fiscal year 2020, federal debt had jumped dramatically and was equal to the size of the nation’s annual output. It is on track to reach 106 percent of GDP in 2031.
Even without these crises, the budget outlook would be deteriorating because of population aging. In 2020, those aged 65 and older accounted for 16.6 percent of the total population, up from 12.3 percent in 1990. By 2050, that cohort will be close to 20 percent.
More retirees mean rapid cost growth for Social Security, Medicare, and Medicaid. In March of this year, the Congressional Budget Office projected federal debt would exceed 200 percent of GDP in three decades—a forecast which does not include the effects of both the $1.8 trillion COVID response plan enacted earlier this year and the bipartisan infrastructure bill approved by the president last month. Both measures will add further to that debt in the coming years.
Over the long-term, it is spending on the major entitlement programs that is the primary source of widening annual budget deficits. The CBO forecasts that spending on Social Security and the major health entitlements will average 15.3 percent of GDP from 2042 to 2051, up from 11.0 percent in 2021.
These projections should be setting off alarms around the government. And yet the nation’s top leaders do not express the slightest concern about what they portend. The prevailing sense is that it will all work out, somehow or another, as it has up to this point. Or at least that the fallout from a debt crisis will occur well past the time when these actors have left the scene.
The dangers from the bipartisan abandonment of fiscal restraint are real. America has never borrowed during peacetime as it is doing so now, and it is inconceivable that continuing down this path indefinitely would have no consequences. For one thing, if the federal government piles up debt as now projected, it is unlikely the U.S. dollar would retain its status as the world’s reserve currency, with all that would imply for borrowing costs and diminished global leadership.
But instead of assembling a gradual plan to avoid such a catastrophe, the nation’s leaders are preoccupied with adding more to the federal government’s benefit commitments.
The BBB plan adopted by the House contains major expansions in subsidies for enrolling in health insurance, unconditional cash support for families with children, free enrollment in preschool for all children ages 3 and 4, and much else.
The plan’s proponents say the bill is fully paid for with spending cuts and tax hikes, but that is not true. The clear intention of the authors is to have these benefits become permanent commitments of the federal government, almost certainly with proposed expansions in their generosity in future years. And yet the House bill sunsets most of the new commitments by mid-decade to artificially lower the advertised total cost. For instance, the higher subsidies for enrolling in health insurance would expire after 2025.
According to the Committee for a Responsible Federal Budget, the bill as written includes new benefits worth $2.2 trillion over ten years (excluding the complicated effects of tax relief for state and local taxpayers). Over the same time period, the tax hikes and other revenues total about $2.0 trillion, leaving a $160 billion hole. Over the first five years, when the costs of the new benefits are mostly in full force, the deficit increase is projected to be $750 billion—more unnecessary fiscal stimulus as inflation soars.
And if all of the new benefit commitments were made available to recipients indefinitely, the total cost of the BBB plan would increase by another $2 trillion over ten years, putting the total cost at $4.2 trillion.
The plan’s advocates respond that when the time comes to extend the sunsetted provisions, Congress will come up with new offsets to cover the expense and ensure deficit neutrality, so there is nothing to worry about.
That argument presumes Congress will identify real offsets instead of gimmicks to satisfy budget rules—which history suggests is doubtful. There are many reasons the gap between federal spending and revenue has steadily widened over the years, but one is that entitlements tend to grow as new recipients find their way to them, and the offsets deliver less revenue than what was projected as the targets find ways to avoid losses.
Further, if every dollar of available revenue is used to pay for BBB’s benefit expansions, how will Congress find the resources to pay for the spending that is already in current law?
This concern seems to be top of mind for Senator Manchin, and rightfully so. He repeatedly expresses a desire to ensure the money is there for existing programs before Congress makes new commitments, and to calibrate the generosity of expanded benefits, not their duration, to match the offsets used to pay for them.
If the federal government is to avert a debt crisis, the long process of turning things around has to begin somewhere. Restraint when writing new commitments is a good place to start. Congress will soon need to go much farther than that.