By Kate Davidson
WASHINGTON — The Biden administration is already looking past its $1.9 trillion coronavirus relief bill and starting to consider how to pay for the next round of programs meant to bolster long-term economic growth with investments in infrastructure, clean energy and education.
The challenges are twofold. Officials must decide how much of the bill to pay for with tax increases and which policies to finance with more borrowing. In a narrowly divided Congress, they must also craft a bill that can win support from nearly every Democrat. The decision will help determine how much of President Biden’s Build Back Better economic agenda he can advance in his first year in office.
The U.S. has borrowed trillions of dollars in the past year to pay for coronavirus relief, including direct payments for households and small businesses. Some Democrats have signaled they may be willing to borrow more to finance programs such as infrastructure if the economic benefits are big enough. But Republicans and some moderate Democrats, including Sen. Joe Manchin (D., W.Va.), say the ballooning national debt is a reason to ensure the spending is offset with tax increases or cuts elsewhere.
Treasury Secretary Janet Yellen said Sunday that the Biden administration hasn’t decided whether to pursue a wealth tax, but will likely issue proposals to address the swelling federal budget deficit.
“That’s something that we haven’t decided yet and can look at,” Ms. Yellen said on ABC’s “This Week with George Stephanopoulos.” She noted that Mr. Biden proposed higher taxes on corporations, on some individuals and on capital gains or dividend payments during his 2020 presidential campaign. “Those are alternatives that address — that are similar in their impact to a wealth tax.”
The president’s economic advisers are just starting to grapple with the issue. While they haven’t ruled out more borrowing to finance parts of the plan, Mr. Biden has continued to talk about his campaign proposals to raise taxes on corporations and high-income households to pay for new permanent programs, said Jared Bernstein, a top economic adviser.
One consideration influencing the administration’s thinking: distinguishing between short-term stimulus and longer-term spending that is likely to feed deficits over many years.
“When you’re worried about fiscal sustainability, the things that hurt you are not the temporary measures,” Mr. Bernstein said in an interview late last month. “It’s the things that are permanent [and] that aren’t paid for.”
In the past year, successive rounds of stimulus spending to combat the coronavirus and its economic fallout have contributed to a nearly $4.5 trillion increase in federal debt held by the public, to $21.9 trillion as of March 1. At roughly the size of the nation’s entire economic output, the debt is the highest since the aftermath of World War II.
Some economists have argued the administration should rethink the way the government sets its fiscal goals, especially in an era of very low borrowing costs. They have proposed new policy guideposts to inform decisions about the right level of debt.
“As you move away from the very short-run need for additional fiscal support, I think the question becomes what’s the framework for the next four or eight years,” said Peter Orszag, who headed the Office of Management and Budget during the Obama administration.
For now, there are few signs of the kind of inflationary spiral or fiscal crisis that policy makers once thought would accompany debt levels like today’s.
That could change in the future. The Congressional Budget Office this month projected that the national debt would double as a proportion of gross domestic product over the next 30 years. The projection doesn’t include the Covid-19 aid package signed by Mr. Biden last week or additional spending plans.
“The risk of a fiscal crisis appears to be low in the short run despite the higher deficits and debt stemming from the pandemic,” the CBO said. “Nonetheless, the much higher debt over time would raise the risk of a fiscal crisis in the years ahead.”
The yield on the 10-year Treasury note was 1.634% on Friday, up from 0.9% at the start of the year, meaning that the cost of borrowing is rising for the government and across the economy. But policy makers have attributed the rise to the brightening economic outlook rather…