Biden's 2025 Budget Proposal (Weekly Insights 3/18/2024)
Last week, President Biden released his $7.3 trillion budget proposal for the fiscal year 2025 which outlined his spending and revenue plans. President Biden aims to reduce the deficit by $3 trillion over the next 10 years and increase spending on programs to assist lower income earners cope with inflation. The budget outlines plans to increase the corporate income tax rate to 28% (from 21%) and establishes a 25% income tax rate for those with wealth of at least $100 million. It is important to understand the process to finalize a government budget of this magnitude, as we are likely months away from seeing any concrete decisions made. In this weekly, we aim to outline the budget process and provide an overview of President Biden’s spending plans (as is) and their potential implications for the economy.
- Budget approval process: Finalizing a budget takes months of negotiations and planning on the part of many different government agencies. Roughly 18 months prior to the start of the next fiscal year, the Office of Management and Budget (OMB) collaborates with various government agencies to put together the President’s budget proposal. The President is required to submit the budget to congress in February. After February, months of negotiation between the House and Senate take place to finalize the budget before a September 30th deadline (the government’s fiscal year starts October 1st).
- Overview of budget: Over the next 10 years, the proposal would raise tax receipts by $4.97 trillion. The tax bill would be footed by individuals earning more than $400,000 annually and large corporations. The tax increases are part of the sweeping spending package which includes expanding child tax credits, reducing the cost of healthcare and a new tax credit that would provide $10,000 to first-time home buyers. The spending package aims to provide further relief for middle income families amid persistent inflationary pressures. According to the U.S. Treasury Department, the proposed budget (as is) would bring down the total deficit by ~$3 trillion.2
- Deficit to improve, but still not good: While the government deficit is projected to improve with this proposal, government spending remains egregious. Most of Biden’s spending plans come from “mandatory” programs, including Social Security, Medicare, and Medicaid, which combined account for ~60% of the spending proposal.
- Current state of government spending: Last week, the U.S. budget deficit widened to $828 billion for the first five months of the fiscal year, which was ~18% higher than a year ago. The increase has been attributed to rising interest costs, which totaled $433 billion in the first five months of the fiscal year. According to Biden’s 2025 proposal, net interest payments are projected to total $890 billion for FY 2024 and are projected to exceed defense spending as a percent of GDP.
The Bottom Line:
While we are not political analysts, it is clear that government spending is a major issue. Higher interest rates have increased our interest payments to inordinate levels. Biden’s proposal is unlikely to gain momentum given the Republican led House. However, we are concerned businesses may pause spending as the future of tax rates remains unclear which can impact GDP. In addition, this is likely to be an election topic as most Americans feel squeezed by higher prices.