Chief Economist Scott Brown discusses current economic conditions.
On Monday, the Treasury Department is expected to report a March budget deficit of about $658 billion, bringing the 12-month total to nearly $4.1 trillion, about 19% of GDP. Proponents argue that the added spending, with more to come, will help to ensure the recovery. Critics charge that it’s overkill, likely to push aggregate demand ahead of supply. The debate over infrastructure spending will amplify these divisions.
The increase in spending reflects last year’s $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the $900 billion Health and Economic Recovery Omnibus Emergency Solutions Act (Heroes Act), and the $1.9 trillion American Rescue Plan Act of 2021. While the three bills total $4.0 trillion, not all of that has been spent. Remember, the annual deficit was on track to exceed $1 trillion before the pandemic. Unlike the Tax Cut and Jobs Act of 2017 (TCJA), which focused relief at the upper end of the income scale, the American Rescue Plan provides larger tax cuts (percentage-wise) to lower income households. The Tax Policy Center estimates that households making under $25,000, would see an after- tax income gain of 20%, and about 35% if they have children. A middle-income household would see a gain of 5.5%.
Government spending fell after the fiscal response to the financial crisis and we can expect it to fall again in this recovery. However, support following the financial crisis, while helping to limit the damage, was not enough to propel the recovery forward. This time, spending will continue into 2022.
Some of the spending will be hard to get rid of. For example, if childhood poverty is cut in half, as many expect, why would you want to do that for just one year? Much of the added spending, including child tax credits, is popular.
The Biden administration has now proposed a $2 trillion infrastructure plan, which broadens the definition of “infrastructure” well beyond roads and bridges, and in its FY22 budget proposal, has asked Congress for a 16% increase in federal spending on domestic priorities, including education, fighting climate change, and reducing poverty.