Getting Spending Under Control III. Helping the Fed Reduce Inflation

The House has passed a bill, the Limit, Save, Grow Act, to both set a budget for FY 2024 and simultaneously raise the debt ceiling by $1.5 trillion.  This is the way things are supposed to be done, i.e. in “regular order.”  Ideally, the Senate would then adopt its own proposed budget for next year (as well as a debt ceiling proposal) and then the two bodies would meet to come up with a common bill to send to President Biden for his signature or veto.

But our fragmented and polarized political system makes regular order almost impossible to achieve.  As it stands right now, President Biden will meet with Congressional leaders on Tuesday, May 9 to try to come to an agreement on raising the debt ceiling and adopting a budget for next year.

Here is why it is so important for next year’s budget to include significant spending cuts as insisted on by House Republicans.

  • The current FY 2023 budget has a deficit projection of $1.4 trillion and President Biden’s proposed 2024 budget of $6.9 trillion represents a big increase in spending over 2023. (see below). In addition, CBO estimates that federal spending will equal 23.7% of GDP this year, well above the pre-pandemic level of 21% in 2019.

  • The House Republican budget proposal for 2024 stills allows spending to increase year-by-year as a percentage of GDP, but at a somewhat slower pace than does the Biden budget, thereby slowing the growth of annual deficits and accumulated debt.

  • U.S. economic growth is very strong as indicated by the latest (April 2023) job growth, unemployment data, and job openings.  This puts strong upward pressure on inflation and makes the Fed’s job to bring inflation down that much harder.

  • The CBO estimates that the House budget and debt ceiling proposal would reduce federal discretionary spending by $129 billion in FY 2024, enough to knock about half of a percentage point off economic growth. This would allow the Fed to reduce interest rates faster than otherwise while bringing inflation back down to the desired 2% level.

Conclusion.  The Fed can’t fix inflation by itself.  It needs fiscal restraint as well.  This is exactly what the House Republicans want to accomplish with their proposed spending cuts for next year.  Hopefully, the House, the Senate, and the President can agree on a plan to both raise the debt limit and cut spending simultaneously to put us back on track to achieve both sound (inflation-free) money and a prosperous (growing economy) future.

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