Washington,
D.C.–The Congressional Budget Office (CBO) responded
to a request
from Republican Members of the Senate Finance Committee for information about
budgetary effects of the high and rising inflation that continues to hammer
American households. According to the CBO, inflation and accompanying
higher interest rates stemming from inflation further erode the fiscal position
of the United States, including adding to the outsized and climbing $30.1
trillion national debt.
“The
stealth tax imposed by inflation is hurting all Americans in the grocery
aisles, at the gas pump, and in every bill they pay,” said Finance Committee
Ranking Member Mike Crapo (R-Idaho). “While inflation threatens
Americans’ pocketbooks today, it also contributes to skyrocketing federal debt
that will burden future generations.”
CBO’s
report
reveals that soaring inflation and mounting interest rates can boost
federal deficits by trillions of dollars.
- Federal revenues could climb from inflation by
trillions, including stealth tax revenues from phantom
inflationary increases not accompanied by increases in people’s purchasing
power.
- Federal outlays climb, with outlays for interest
payments on federal debt soaring by trillions.
- Federal deficits climb by trillions, as outlay
increases outstrip revenue gains.
According
to CBO’s report released today:
- “In
general, if inflation was persistently higher than it is in the
Congressional Budget Office’s economic forecast and if interest rates
were also significantly higher but all other inputs to the budget
projection process were unchanged, then projected budget deficits and
debt would be larger in dollar terms, on net, throughout the 2022-2031
period.”
- To
provide an illustrative estimate, CBO analyzed how its budget
projections would have changed from its February 2021 pre-inflation period
if it had instead used the higher paths for inflation and interest
rates (“high-rate scenario”) that have arisen and have been fueled by
Biden Administration policies. Under that scenario, CBO
says:
- “The projected deficit
would be larger by $2.3 trillion from 2022 to 2031 under the high-rate
scenario than in the baseline.”
- “The larger budget
deficits would arise primarily because the government’s net interest
costs would be [$2.5 trillion] higher…” - “Larger increases
in wage rates and prices generally lead to greater labor income, profits,
and other nominal income, which in turn generate larger collections of
individual income taxes, payroll taxes, and corporate income taxes.”
How much? $3.4 trillion increased revenue in the high-rate
scenario, partly stemming from stealth taxes on phantom gains that are not
gains people see in purchasing power of their wages and incomes.
Even worse, because not all the aspects of the tax code are indexed to
inflation, more and more middle- and working-class Americans will become
subject to taxes originally imposed on the “rich.”
- In the high-rate
scenario, revenues would rise by $3.4 trillion, federal outlays would rise
by $5.7 trillion, and the federal deficit would rise by $2.3 trillion
relative to CBO’s baseline without high inflation and interest rates.
Background:
Consumer
price inflation increased to a staggering 7.5 percent in January from below 1.5
percent when Biden took office. The untargeted $1.9 trillion spending
spree enacted by Democrats last year on a partisan basis helped fuel high,
accelerating inflation. Even left-leaning economists warned that last
year’s big-spending agenda created risk of an inflation spike, with former
Treasury Secretary Larry Summers labeling the spree as the “least responsible
macroeconomic policy we’ve had in the last 40 years.”
The
national debt is projected within a decade to surpass its historical high and
then continue to climb. Once a new crisis arises that awakens needs or
calls for more debt-fueled spending, the added debt pushes the United States
further toward unchartered territory and closer to the limits of a fiscal
crisis.
As
the CBO has repeatedly warned, our high and rising federal debt risks a fiscal
crisis. Last year, CBO observed:
“Debt that is high and rising as a percentage
of GDP boosts federal and private borrowing costs, slows the growth of economic
output, and increases interest payments abroad. A growing debt burden
could increase the risk of a fiscal crisis and higher inflation as well as
undermine confidence in the U.S. dollar, making it more costly to finance
public and private activity in international markets.”
High
and rising debt, and resources needed to service the debt, also leaves less
“fiscal space” available for use in everything from low-income support programs
to national defense, and further limits our ability to respond to new
crises. As CBO identified in the same report last year:
“High and rising debt also might cause
policymakers to feel constrained from implementing deficit-financed fiscal
policy to respond to unforeseen events or for other purposes, such as to
promote economic activity or strengthen national defense.”