Dems' $3.5T reconciliation bill could slash GDP as government debt spikes

The massive, multitrillion-dollar tax and spending package that congressional Democrats are currently crafting would weigh on the U.S. economy in the long term, causing the nation's deficit to spike and the GDP to decline, according to a new study.

The $3.5 trillion measure is expected to include federally funded paid family leave, expand public education, establish community colleges and combat climate change. It would be paid for by a bevy of tax hikes on wealthy Americans and corporations, although lawmakers are still hashing out the specifics.  

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Democrats have billed the plan, which forms the basis of President Biden's "Build Back Better" agenda, as a once-in-a-generation investment opportunity — but the proposal could cause GDP, the broadest measure of goods and services produced in a country, to shrink by 4% in 2050, relative to the current baseline, according to findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School.

At the same time, the multitrillion-dollar bill could cause federal debt to surge by roughly 8.9%, assuming the provisions included in the legislation phase out after a 10-year period. Democrats have not yet released legislative text.

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If the spending proposals continue indefinitely after the 10-year window, government debt is projected to grow by a staggering 16.4% in 2050, while GDP would shrink by 4.8%.

Specifics of the $3.5 trillion package are likely to change before Democrats craft the final bill they plan to pass along a party-line vote in coming weeks using the procedural tool known as budget reconciliation, which allows them to bypass a Senate filibuster by GOP lawmakers.

There's a growing divide among Democratic lawmakers over the passage of the spending bill; at the center of the dispute is a fight for control over the size and scope of the $3.5 trillion plan. 

Progressives say that $3.5 trillion is the bare minimum needed to vastly expand the social safety net and combat climate change. Centrist Democrats, however, are wary of another multitrillion-dollar bill – funded by a bevy of new taxes, no less – after the coronavirus pandemic pushed the U.S. deficit to a record high. (The U.S. budget deficit ballooned to a record $1.7 trillion in the first half of the fiscal year, and the nation's debt is on track to surpass $30 trillion).

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With their slim majority in both chambers, Democrats face a delicate balancing act in pursuing their so-called "two-track" agenda – approving both a bipartisan deal and a reconciliation package that could cost several trillion dollars – or they risk losing the support of either moderate or progressive members. 

Sen. Joe Manchin, D-W.Va., has called for a "pause" in the reconciliation bill and has repeatedly said he does not support passing another multitrillion-dollar spending bill. 

Other Democrats have blasted Manchin's comments; Sen. Bernie Sanders, the chairman of the Senate Budget Committee, likewise pledged to tank the infrastructure bill unless it was accompanied by the reconciliation measure.