Manchin's debt worries belie brighter budget picture

From: POLITICO's Morning Money - Tuesday Oct 26,2021 12:03 pm

Oct 26, 2021

By Kate Davidson and Aubree Eliza Weaver

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Quick Fix

As negotiations continue over a deal on President Joe Biden’s social policy legislation, it’s worth remembering what’s ostensibly driving the angst for Sen. Joe Manchin (D-W.Va.): government borrowing.

Manchin has pointed to the risks of soaring budget deficits and debt associated with massive spending plans — never mind that Democrats proposed revenue increases they said would eventually offset the entire cost of the legislation. He has a kindred spirit in Biden, who has also insisted the plan be fully paid for, despite a shifting view among mainstream economists (including some in his own administration) that the government can afford to borrow more as long as the costs of servicing the debt are projected to remain low. Undeterred, Republicans are gearing up to make the debt a major campaign issue next year in their bid to take back Congress.

So what’s the current budget picture really look like? The Treasury released new data last week on spending and revenue collection in the fiscal year that ended Sept. 30. Here are some of the key takeaways:

—The annual deficit shrunk: The U.S. recorded a smaller budget gap in fiscal 2021 than it did in 2020, but that was widely expected. Congress passed a giant fiscal stimulus program to combat the pandemic last year, and a severe economic collapse weighed on federal revenue and boosted costs for safety net programs. To call the 2020 shortfall “Trump’s record deficit,” as some left-leaning Twitter voices have, is a bit disingenuous--both parties supported more spending to cushion the economy, and the downturn would have been much worse without it.

As for 2021, the $2.8 trillion budget gap was actually bigger than the Congressional Budget Office projected at the beginning of the year. That’s largely because of the Biden administration’s $1.9 trillion American Rescue Plan enacted in March, which officials have credited with returning economic growth to its pre-pandemic levels (though perhaps fueling more demand than the economy can handle right now). The annual deficit as a share of GDP totaled 12.4 percent, down from the previous year but nearly triple what it was in fiscal 2019.

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

—Revenue is soaring: Tax receipts are skyrocketing as economic activity ramps up, as our colleague Brian Faler reported last week . Receipts rose 18 percent in fiscal 2021, and totaled 18.1 percent as a share of economic output, nearly two percentage points higher than they were in the previous year and than CBO expected in February. A senior administration official, on a call with reporters, credited the growing economy for the boost, which was led by corporate tax receipts.

—Interest costs rose: Net interest payments — that is, the cost of servicing the debt — edged up 2.2 percent in fiscal 2021, to $352.3 billion, partly because the debt has grown and partly as a result of higher inflation. That’s in sharp contrast to the previous year, when interest costs actually fell despite a historic rise in government debt. Still, at roughly 1.6 percent, interest costs as a share of GDP were well below their historical average.

-Debt as a share of the economy declined: Another benefit of surging growth: Debt as a share of gross domestic product dipped below 100 percent, to 99.5 percent at the end of September, from 100.2 percent at the end of the previous fiscal year, Treasury said.

The Biden administration has insisted its infrastructure and social policy agenda, including new spending on education, health care and climate initiatives, will improve the overall debt picture over time by bolstering economic growth. A big question: How will a narrower set of proposals, with potentially less deficit spending, affect that outlook? We’ll be watching for Congress’s independent scorekeepers, the CBO and Joint Committee on Taxation, to weigh in.

IT’S TUESDAY —One day down, four more to go. Say it with me: We will all get through this week. Got tips? You know what to do: Email kdavidson@politico.com, or DM @katedavidson on Twitter.

A message from the American Bankers Association:

America’s banks firmly believe that everyone should pay their taxes, but a proposal in Congress would force banks to provide details to the IRS on what’s going in and out of millions of bank accounts across the country. This dragnet of data collection raises serious questions about Americans’ right to privacy. Learn more about the issue and take action here.

Driving the Day

Bank Policy Institute hosts a symposium on financial inclusion starting at 9 a.m. … Commerce Department releases data on September new home sales at 10 a.m. … Senate Finance Committee meets at 10 a.m. to consider several U.S. Trade Representative and Treasury Department nominations, including Joshua Frost to be assistant Treasury secretary for financial markets. … Committee for a Responsible Federal Budget hosts a discussion with Treasury’s Natasha Sarin on tax enforcement proposals at 3 p.m.

MANCHIN AT DC ECONOMIC CLUB: The Economic Club of Washington will host Manchin this morning at an 8:30 a.m. breakfast, where he’ll be interviewed by the Carlyle Group’s David Rubenstein.

Deal is close: Manchin told reporters Monday that reaching a framework to execute the bulk of Biden's domestic agenda “should be” feasible this week , our colleagues Marianne LeVine and Burgess Everett report. “However, Manchin said he still has concerns with the party’s efforts to expand Medicare benefits to vision, dental and hearing, as well as a push to close the Medicaid coverage gap and expand paid leave.”

Senate Democrats are expected to release details on their new revenue proposals tomorrow, including a proposed tax on billionaires. The plan is raising conceptual questions about what counts as income , NYT’s Neil Irwin writes: “And by applying the new tax system only to a few hundred families that are very wealthy, Democrats are betting that they will not cause excessive hassles to millions of moderately wealthy Americans.”

LESS THAN A QUARTER OF EVICTION AID DISBURSED: From our Katy O’Donnell: “Treasury Department data released Monday showed the disbursement of federal rental aid has started to plateau , despite Biden administration pressure on state and local governments to ramp up delivery of the money to avert evictions during the pandemic.”

“State, local and tribal officials had disbursed about $10.7 billion in rental assistance as of the end of September, representing less than a quarter of the $46.5 billion Congress authorized in two tranches since last December. The release of $2.8 billion in September marked a 9.1 percent increase from August, which had seen a 44.7 percent increase from July.”

BECOME A GLOBAL INSIDER: The world is more connected than ever. It has never been more essential to identify, unpack and analyze important news, trends and decisions shaping our future — and we’ve got you covered! Every Monday, Wednesday and Friday, Global Insider author Ryan Heath navigates the global news maze and connects you to power players and events changing our world. Don’t miss out on this influential global community. Subscribe now.

TREASURY TAPS JPMORGAN ALUM AS NEW RACIAL-EQUITY CHIEF: Bloomberg’s Chris Anstey: “The U.S. Treasury is creating a new role of point person for racial equity , hiring JPMorgan Chase & Co. veteran Janis Bowdler for the job. Bowdler served as head of global philanthropy at the Wall Street giant, a unit that aims to support inclusive growth. She has long worked on boosting prospects for underserved communities, having started her career working to rejuvenate Cleveland’s east side neighborhoods.”

The Fed announced it will host a series of diversity and inclusion conferences in November focusing on underrepresented groups and their experiences in the economics profession, central banking, finance and the economy overall, Reuters reported.

TRANSITIONS: Washington Post economics correspondent Heather Long is joining the Post opinions section as a weekly columnist and the lead editorial board writer on economics, business, inequality, labor and other issues, the paper announced Monday.

DEPARTMENT OF AWKWARD: In case you missed it, Treasury Secretary Janet Yellen on Sunday said she thought Larry Summers — former Clinton Treasury Secretary whom President Obama passed over for the Fed chair job in favor of Yellen — was wrong to suggest officials have lost control of inflation. “I agree, of course, we are going through a period of inflation that's higher than Americans have seen in a long time. And it's something that's obviously a concern and worrying them. But we haven't lost control,” she said on CNN’s “State of the Union.”

Summers pushed back on Twitter Monday, calling her assertion that inflation has decelerated in recent months misleading: “She expresses confidence that inflation is decelerating and will be back to target levels by the end of next year. I hope she is right but I think it’s much less than a 50/50 chance.”

Summers actually deleted a tweet in the thread in which he asked, “I’m curious at what point in the last 40 years Treasury thinks the risks of an inflation spiral are greater than they are now.” (This one stuck out to your MM host, who tweeted the quote before it was apparently nixed.)

A message from the American Bankers Association:

Fly Around

WHERE’S THE FED VICE CHAIR FOR SUPERVISION? That’s the question Wharton professor Peter Conti-Brown asks in an op-ed published this morning by the Brookings Center on Regulation and Markets . “By failing to appoint a successor to [former vice chairman Randal] Quarles, the Fed has turned up the heat on the politicians to give us—the people and institutions affected most by the Fed’s regulatory and supervisory work—the chance to perform our role in vetting the nominees for this job.”

FED PREPARES TO TAPER STIMULUS — WSJ’s Nick Timiraos: “Federal Reserve officials are set to wind down their $120 billion-a-month bond-purchase program in November, but questions over how soon inflation pressures will fade are creating more uneasiness inside the central bank.”

BUSINESS ECONOMISTS LESS OPTIMISTIC NEXT YEAR’S GROWTH — AP’s Martin Crutsinger: “The nation’s business economists are slightly less optimistic about growth prospects over the next year, noting a number of threats ranging from higher-than-expected inflation to lingering disruptions from COVID-19 and snarled supply chains.”

STUDY: BITCOIN IS STILL CONCENTRATED IN FEW HANDS — Bloomberg’s Emily Graffeo: “Bitcoin’s surging popularity hasn’t changed one of its original attributes. Its ownership is still concentrated in just a few hands. The top 10,000 individual investors in Bitcoin control about one-third of the cryptocurrency in circulation, according to a study by the National Bureau of Economic Research.”

DOLLAR STEADIES AFTER BOUNCE OFF OF ONE-MONTH LOW — Reuters’ David Henry: “The dollar steadied on Monday afternoon after bouncing off a one-month low as traders weighed the prospects of higher interest rates for different currencies and considered how coming economic data and central bank comments could impact their positions.”

A message from the American Bankers Association:

A proposal in Congress would force financial institutions to provide details to the IRS on the inflows and outflows of millions of bank accounts. While supporters say the proposal is aimed at reducing the tax gap by targeting wealthy tax cheats, this data dragnet would actually capture information from millions of small businesses and consumers who are not suspected of tax avoidance.

Everyone should pay their fair share of taxes, but this proposal goes too far and raises serious questions about Americans’ right to privacy—while damaging the hard-earned trust between banks and their customers. Tell Congress to oppose this misguided reporting regime and demand that the IRS focus on tax cheats, not all taxpayers.

It’s not too late to protect your financial data. Learn more about the issue and take action here.