New taxes on big businesses and on higher earners in the US will form part of moves by the Biden administration aimed at cutting the country’s financial deficit by $3 trillion (€2.84 trillion) over 10 years.
However, the plan is unlikely to resolve arguments over government spending among politicians in Washington DC, which are threatening the ability of the country to pay its debts from later this year – holding open the prospect of a hugely damaging debt default.
On Thursday, US president Joe Biden is due in Philadelphia to announce his proposals for the 2024 budget. He is looking at steeper cuts to the US deficit than publicly envisaged a few weeks ago.
But his Republican political opponents, who now control the House of Representatives in Congress, are unlikely to be impressed.
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Republicans are worried about US national debt levels and want greater curbs on spending. The party’s leaders have ruled out highly controversial cuts to medical and social security programmes but US foreign aid as well as food assistance and housing initiatives for the poor could be targeted for reductions.
Under US law it is Congress that writes the federal budget and Biden’s proposals will, effectively, form the basis for negotiations between politicians on Capitol Hill and the White House.
Republicans, however, are unlikely to look kindly on the president’s plans for higher taxes and talks on the budget will come against the backdrop of a looming deadline over the debt ceiling, which limits the amount the United States Government can borrow.
On Wednesday the head of the Federal Reserve – the central banking system of the US – warned Congress that it must raise the debt ceiling to avoid an unprecedented default.
Chairman Jerome Powell told the House of Representatives financial services committee that “no one should assume that the Fed can protect the economy from the non-payment of the government’s bills, let alone a debt default”.
On January 19th, the US government reached the statutory $31.4 trillion limit on the amount it could legally borrow to meet its day-to-day obligations. The US treasury in the meantime is using a series of “extraordinary measures” – essentially accounting manoeuvres – to continue to pay its bills.
Treasury secretary Janet Yellen said in January this practice would allow the government to get by financially, at least until the beginning of June.
However, in the absence of a new political agreement on borrowing or at least on a suspension of the legal debt limit, the US could run out of money to pay its debts sometime after that.
Earlier this week Moody’s Analytics warned that a default would “be a catastrophic blow to an already fragile economy” and that up to one million jobs could be lost.
It suggested that the economy could plunge into a “mild” recession and the unemployment rate could jump from the current low of 3.4 per cent to almost 5 per cent.
Powell also rejected on Wednesday suggestions that the US treasury could “pull a rabbit from the hat” by minting a so-called trillion-dollar coin to be deposited with the Fed to prevent a debt default.
The president’s budget proposals for 2024 would seek to cut the US deficits by nearly $3 trillion over 10 years.
He had previously suggested making cuts of about $2 trillion when he gave his state-of-the-union address to the US Congress last month.
The White House told reporters on Wednesday that Biden’s budget would propose “tax reforms to ensure the wealthy and large corporations pay their fair share while cutting wasteful spending on special interest interests, like big oil and big pharma”.
The White House did not provide details in advance about how it would achieve the additional $1 trillion in deficit reductions although it is likely to involve additional tax hikes on wealthy Americans and corporations.
The president stated on Twitter on Wednesday: “This week, I’ll show Americans my full budget vision to invest in United States, lower costs for families, and grow the economy without raising taxes on anyone making under $400,000.”
The Biden budget proposals are expected to involve the introduction of a new tax on American households worth more than $100 million that would apply to both their earned income and the unrealised gains in the value of their liquid assets such as stocks.
The budget will also see a quadrupling of a tax put in place last year on companies that buy back their own stock.
There will also be additional savings generated from new provisions that will allow the Medicare – the federal health insurance system for older people and those with certain disabilities and conditions – to negotiate on prescription drug costs.
