Fisher Investments Explains | Are One Big Beautiful Bill Budget Fears Justified?

Transcript

Ben Lederer:

OBBBA deficit expansion looks as big as other recent major legislation, such as Covid era stimulus packages, because the Congressional Budget Office, or CBO, estimated the law will expand the primary US budget deficit by $3.4 trillion over ten years. However, the macroeconomic effects should be far smaller.

To understand why, consider one of OBBBA's main goals; to preserve the tax cuts from the 2017 Tax Cut and Jobs Act, or TCJA. Congress passed TCJA using a process called budget reconciliation, which bypasses the Senate filibuster, but stipulates the legislation must not increase the budget deficit beyond the ten-year budget window. That is why many of TCJA's tax cuts were set to expire at the end of 2025. Extending those tax cuts changed nothing in macroeconomic terms, but it altered the CBO scoring because the CBO measures legislation against current law. In this case, when figuring the 2017 tax cuts expired at the end of 2025 and not against current tax rates. When we exclude those tax cut extensions, therefore comparing changes to current tax rates, OBBBA actually decreases the deficit over ten years.

But don't confuse OBBBA for an austerity package. Congress appears to be gaming that ten-year budget window by frontloading spending and backloading cuts. Understanding future Congresses are likely to defer many of those planned cuts as they approach. This strategy allows Congress to pass some new business and personal tax cuts now, along with some spending priorities like defense and homeland security, without raising offsetting revenue. Widely feared Medicaid cuts are indeed large, but most begin after the midterm election, at which point the next Congress must decide, likely under significant pressure from constituents if it wants to delay those cuts.