Biden contradicts himself with victory laps on deficit reduction and student loan relief, experts say


President Joe Biden took a victory lap on Friday for the largest one-year decline in the federal deficit in American history.

That’s despite deficits remaining historically high and all of the record $1.4 trillion deficit drop driven by the expiration of Covid emergency spending.

Hours later, Biden defended the student debt forgiveness program, a program that completely wipes out the modest deficit savings created by the Inflation Reduction Act.

Biden’s dueling narratives confused some budget watchers who remain deeply concerned about America’s debt mountain.

“I find it contradictory,” Dan White, senior director of economic research at Moody’s Analytics, told CNN on Friday. “Then the administration’s policies have increased the deficit, not reduced it.”

Maya MacGuineas — chairwoman of the Committee on a Responsible Federal Budget, a deficit watchdog group — said that in addition to the SCA, the Biden administration has made the fiscal situation worse, not better.

“The White House is obviously twisting the facts to tell a very different story than the correct and accurate story,” MacGuineas told CNN on Friday.

Asked about the optics of encouraging deficit reduction hours before highlighting the student debt program, MacGuineas was puzzled.

“It’s kind of offensive to the audience,” he said, “as if they’d mislead us into taking the claim of fiscal responsibility, which isn’t guaranteed, and to separate it from this massive deficit-busting executive order that’s costing hundreds of billions of dollars.”

The White House did not respond to a request for comment on the criticism.

But David Kelly, chief global strategist at JPMorgan Funds, said the Biden administration deserves credit for a strong economy that has helped boost tax revenue.

“The economy has fully recovered from the pandemic. And that’s helping to bring the deficit down,” Kelly said.

The Inflation Reduction Act is expected to reduce the federal deficit by $238 trillion over 10 years, according to the Congressional Budget Office. However, most of these savings will occur by the end of the decade. And that’s a relatively small savings compared to America’s $31 trillion in debt.

“Two hundred and thirty-eight billion dollars is a drop in the bucket,” White said.

Regardless, Biden’s student debt relief, which will help millions of borrowers, will more than offset those savings. CBO projects that student debt forgiveness will increase the deficit by $400 trillion.

The good news is that deficits are shrinking, and shrinking faster than many thought. This should reduce the risk of a debt crisis or downward pressure on financial markets forcing drastic budget cuts.

The Treasury Department said the annual budget shortfall fell to $1.4 trillion in the fiscal year that ended Sept. 30. That’s a huge improvement over the record $3.1 trillion in fiscal 2020.

The bad news is that deficits remain very high, surpassing any year except the peak of Covid and the Great Recession.

And it is important to understand why the deficit has fallen so significantly. It’s not because the government has gotten massive spending programs like Social Security or Medicare and Medicaid on a sustainable path. This is because the emergency Covid spending that pushed the deficit to new heights has expired. Airline bailouts, stimulus checks and forgivable loans are thankfully in the rearview mirror.

“That’s the only reason,” said Moody’s White. “If the Biden administration is to take credit for anything, it’s not making things worse than they already are.”

The Committee on a Responsible Federal Budget estimates that more than 100% of the 2022 deficit reduction is due to Covid mitigation. The group estimates that Biden’s actions so far have increased deficits by $4.8 trillion through 2031.

“I would like to give credit to the White House. Unfortunately, their album doesn’t give you anything to cheer about,” said MacGuineas

Biden rightly pointed out in his speech on Friday that deficits have increased throughout the tenure of his predecessor, former President Donald Trump, the self-proclaimed debt king.

“The federal deficit went up every year in the Trump administration, every year he was president,” Biden said. “It went up before the pandemic. It went up during the pandemic.”

These increases reflected not only emergency spending due to Covid, but also due to controversial tax cuts, which failed to deliver as advertised.

“For me, things have been different,” Biden said. “The deficit has gone down in the two years I’ve been in office.”

MacGuineas agreed that Trump had a “terrible” record on the deficit, but struggled to say that Biden had done a better job on the issue.

“Both, in times of economic strength, continued to borrow fiscally recklessly,” MacGuineas said. “Neither showed fiscal responsibility until eight days after Biden signed the Inflation Relief Act.”

Looking ahead, US policymakers still face a serious challenge to strengthen the fiscal position.

Kelly, the JPMorgan executive, is pleased that the debt-to-GDP ratio, a closely watched figure, appears to have peaked, at least for now.

“We are in a better place. But we really need to do politics in a logical way to meet the real needs of the economy, not just in a vote-getting way,” Kelly said. “Both parties are guilty of that.”

MacGuineas is more concerned, noting that Uncle Sam’s borrowing costs have risen because the Federal Reserve has raised interest rates sharply to combat inflation.

“It’s a moment we’ve all been worried about,” MacGuineas said.

White also said that the United States remains on a sustainable fiscal path, especially looking to the future.

“Problems that I thought would be my grandchildren’s problems,” he said, “will now be my children’s problems.”