Fiscal policy ‘has made inflation much worse rather than better,’ CRFB president says

Committee for a Responsible Federal Budget President Maya MacGuineas joins Yahoo Finance Live to discuss the expectations for President Biden’s budget proposal for 2024, increasing interest payments, reducing debt, and inflation.

Video Transcript

JULIE HYMAN: The White House is set to release President Biden's budget proposal for 2024. The stakes are higher than ever with the national debt approaching record levels. It depends on which economists you talk to of how concerned they are about that one. But interest payments are also set to triple over the next decade to become the single largest line item in the federal budget by 2050. This according to the Committee for a Responsible Federal budget.

And the president of that organization, Maya MacGuineas, is joining us now to discuss. Maya, it's great to see you. Thank you for being here and always being so gracious to talk to us about these budgets, which are a thorny issue to dive into. What we know about the budget from what we know about the budget thus far, what stands out to you if you had to put things in the negative and positive column?

MAYA MACGUINEAS: Well, I think we have a pretty good sense of what we're going to see in this budget. The president has already floated his plan to help lengthen the solvency period for Medicare. And that plan is raising more revenues and putting additional revenues into the Medicare Trust Funds. And I think that's kind of illustrative of what we're going to see throughout the budget, which is we know the president is going to stand for, push for a lot of new revenues. This was what was in his budget last time.

They've already raised some taxes, but a lot of taxes they've looked at, for instance, increases in corporate income taxes, haven't happened. And I'm quite certain that the big push in this budget will be new revenues. It will cover additional spending. And there will also be deficit reduction. So from a fiscal perspective, it's a step in the right direction. Assuming they do reduce the deficit, that is the right thing. But I think the devil will be in the details, and I can tell you, as is the case with most presidential budgets, this will go nowhere. This will not be the beginning of earnest negotiations, which is what we really need.

INES FERRE: Go nowhere? Oh, no. Tell us a little bit about how does inflation play into all of this because inflation is really front and center this year. Talk to us about the challenges when it comes to inflation and this budget.

MAYA MACGUINEAS: Excellent question. Obviously, dealing with inflation is one of those important economic priorities that there is right now. It falls mainly to the Fed to handle this, but not entirely. And what we've seen for the past years is that fiscal policy, which has been expansionary, even once the economy was strong, has made inflation much worse rather than better. And so one of the things normally, when the fiscal situation is bad as it is right now, one looks for how is the debt to GDP going to look over a 10-year budget, 10-year window in the budget that the president submits? It's going to be different this year.

We're going to be looking very closely at what happens in those first two years. A lot of times, what you see with politicians is they plan to borrow even more in the short-term and promise to save a lot later. No surprise that savings doesn't happen as often as one would hope it might. But in this case, it's really going to be important that we see those savings immediately next year and the following year when inflation are still supposed to be strong. And just as a reminder, what we're already seeing because of rising interest rates, huge, huge interest payments.

We are on track if we don't borrow anything new in the next 10 years to spend $10.5 trillion on interest payments. Within five years, we'll be spending more on interest than we do on defense. So that's a real warning sign that because we have so much debt, when you see high inflation and then subsequent high interest rates, it really costs the overall budget a tremendous amount.

JULIE HYMAN: So, obviously, making it clear why this is an acute need to address right now. Maya, you mentioned it's not going to get done, right? And just to be clear to our viewers, right, when a president comes out with a budget, it's effectively a wishlist, right? It's a list of things that the president would like to do. But the president can't come out and just raise taxes without any-- he needs Congress to be on board for at least some of this stuff that is within the budget. What's the most likely to get done, especially considering the Congress that we have right now, and/or what can the president just do on his own?

MAYA MACGUINEAS: So what the president has really here to use is the bully pulpit, meaning once he puts his budget forward, is he going to continue to push some of those ideas, many of which will be popular, at least with his party. There's a lot of divide between the parties and what's popular these days. But is he going to push his priorities, or is just going to put his budget out there and let it lie? And if he's serious about it, he'll push it. But honestly, it is going to be such a kind of bookend of what Democrats might want and be contrasted with what we're going to see out of the Republicans when the House Budget Committee does their budget.

I think this is just going to be here are the two ends of what people might want. One is going to be all taxes. The other is going to be all spending cuts. Neither of them is realistic. And frankly, neither of them is the right policy. We need compromises on both. So what one hopes is, this will be the beginning of the budget season, the budget process. It's a month late. But next, what we expect to see is the House and Senate Budget committees submitting their own budgets. It will be really important that each of those committees put forth budgets.

Frankly, last year, neither of them got budgets out of committee. And you kind of wonder, like, what is the Budget Committee doing if they're not putting forth the budget. There's a rumor the Senate might not try to do a budget, and I desperately hope that's not true. It would be a huge abdication of responsibility at this moment when the fiscal situation is so bad. But once we see the budgets out of those two committees, they will attempt to reconcile them.

Again, I don't think they'll succeed, but the reason it's so important that we go through this process right now is the other option is we talk about these issues as part of the debt ceiling. And that is a much more risky strategy with many, many dangerous potential outcomes when people are talking about not lifting the debt ceiling unless we get some savings done. We do need budgetary savings. We need it because the debt is high and we need it because inflation is high.

But the best thing would be is if we could negotiate those through the normal budget process, the president will have started it. It's really going to fall into the budget committees to see whether they can wrestle through these numbers and come up with some actual savings, get that done well in advance of the need to lift the debt ceiling, which we should do without drama.

JULIE HYMAN: Well, hopefully, that will happen, but given past history, I'm not sure how likely unfortunately that is to be the case. Maya, great to catch up with you. Thanks for your time this morning. Maya MacGuineas, president of the Committee for a Responsible Federal budget.