Whoever takes the presidential oath of office at noon Jan. 20, 2025, Democrat or Republican, will face a choice that so far has seen surprisingly little public discussion: keep Americans’ insurance bills low, or their taxes low.
After dropping sharply in 2022, the budget deficit is rising again, which was confirmed by a Monday report from the Congressional Budget Office. With that, a debate over spending and taxes is also revived, after being largely dormant since the Barack Obama administration.
Fighting the deficit, the difference between the government’s revenues and its spending, would mean either cutting back or raising taxes. But the obvious areas to cut that a reelected Joe Biden or a new president would have to choose from are among the most politically sacred for each party: the individual portions of the 2017 tax cuts enacted under Donald Trump beloved by Republicans, or the subsidies for health insurance under Obamacare prized by Democrats.
Both are scheduled to end in 2025, making them obvious targets for savings.
“If you’re not willing to go after these, you have to be willing to go after something else, so that the dollars are in play,” said Douglas Holtz-Eakin, president of the conservative American Action Forum and a former economist in the George W. Bush White House.
“If you’re not willing to go after these, you have to be willing to go after something else, so that the dollars are in play.”
– Douglas Holtz-Eakin, president of the American Action Forum
Hit by the double whammy of COVID closures hurting the economy plus a pandemic-era expansion of the social safety net, the deficit more than tripled in 2020, to over $3.1 trillion. But as the economy recovered, so too did the government’s budget.
The 2021 deficit slid to $2.8 trillion, and the 2022 deficit fell even more, to $1.4 trillion, allowing Biden to proudly proclaim he had cut it in half.
But with the 2023 budget year ending soon, the bad news for the White House is the deficit is going back up again, with no pandemic or economic crisis to justify the increase.
Republicans have recently been vocal about the need to do something about the deficit, even though the party was largely responsible for blowing past annual spending limits under Trump. But they are not the only ones concerned.
FRED, St. Louis Federal Reserve Bank website
Jason Furman, former chairman of the Council of Economic Advisers under Obama, said he doesn’t consider himself a deficit hawk, but a deficit that this year may be equivalent to 8% of the size of the entire economy is concerning.
“That’s quite a lot” during a time when the economy is not facing a crisis, he said.
The CBO on Monday confirmed speculation that the deficit is likely to bounce back up after shrinking sharply in 2022 as the economy strengthened.
“Excluding the effects of the changing plans for student loans, the deficit is on track to double from $1.0 trillion in 2022 to $2.0 trillion in 2023, CBO estimates,” the nonpartisan agency said in its monthly look at the revenues and spending.
In 2022, President Biden’s student loan forgiveness plan added about $379 billion to the deficit, CBO said. However, the Supreme Court ruled this summer that move was unconstitutional, saving almost that much this year and bringing the final 2023 deficit number down to about $1.7 trillion.
With only two weeks to go until the end of the government’s budget year, the CBO’s estimate is likely to be largely on target. The official number, out in October from the Treasury, will add to Republican presidential candidates’ ammo on the campaign trail to attack Biden as a spendthrift.
But none of the candidates so far have put forward realistic plans to make a dent in the deficit if they do win next year. Trump has talked about using revenues that would come from allowing increased energy exploration on public land, while others have talked about scrapping entire Cabinet-level departments. But none of those would provide more than a fraction of the potential deficit reduction that allowing Obamacare spending or some of the Trump tax cuts to expire would.
The deficit figures are already being hailed by members of the House Freedom Caucus, a group of conservative and libertarian Republicans, as a reason to cut annual government spending to pre-pandemic levels, even as Senate Democrats and the White House warn that position would lead to a government shutdown.
“We’re not interested in a continuing resolution that continues the policies and spending of the Biden-Schumer-Pelosi era. And we’re not going to vote for it,” Freedom Caucus Chairman Scott Perry (R-Penn.) said Tuesday, invoking the names of the president, the Democratic leader of the Senate and the former House speaker.
Sen. Chuck Schumer (D-N.Y.) urged House GOP leaders “to refuse to cave to the extremist demands from 30 or so members way out on the fringe.”
“There’s only one way we’ll avoid a costly government shutdown — bipartisanship,” he said.
“There’s only one way we’ll avoid a costly government shutdown — bipartisanship.”
– Senate Majority Leader Chuck Schumer (D-N.Y.)
One prominent Republican apparently sees no conflict between the burgeoning deficit and further tax cuts. Trump has discussed with his economic advisers cutting corporate taxes even further if he wins in 2024, according to a report in the Washington Post. The proposal would be paired with a sharp hike on tariffs on imported goods as a potential way to offset the tax cuts’ budgetary cost.
Furman said dealing with the expiring tax cuts put in place in 2017 is the most pressing fiscal issue, given their size. “I think that’s the biggest way in which I could picture the deficit moving up or down, but I don’t think it’s enough,” he said.
The Obamacare subsidies should also be looked at, he said, though he admitted to “divided loyalties” on the subject as a supporter of Obama’s health care overhaul.
The CBO said in February the subsidies would cost a little over $700 billion dollars between 2026 and 2032, a not-insignificant sum in budget terms in a government that spends about $6 trillion annually.
For the individual tax cuts, allowing those lowered rates to continue past 2025 would cost about $1.8 trillion through 2033, according to the bipartisan Committee for a Responsible Federal Budget.
Holtz-Eakin said Republicans could have a different target in 2025, should a deficit fight come back around: the clean energy tax subsidies in last year’s Inflation Reduction Act. Rolling those back would net about $900 billion.
But all of those options would be politically difficult. Holtz-Eakin said if a deal is to be struck in 2025, it would have to be bipartisan for it to survive over the long run.
“To do this right, you have to get bipartisan support. You can’t do this in reconciliation. You have to get people to buy into the plan and have it be a little bit durable,” Holtz-Eakin said.
And of course, there’s always the option lawmakers have turned to before: putting off a decision until later and extending both the individual tax cuts and the Obamacare spending.
“If history’s any guide, that’s where they’ll land,” he said.