Inflation risks remain as Congress eyes billions in year-end spending spree: budget hawk

The lame-duck Congress is eyeing hundreds of billions of dollars in new borrowing at the year that would create new inflationary pressures in the U.S. just as prices began to ease in October, a federal budget hawk warned this week.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told FOX Business that Congress will come under pressure in the next few weeks to send the national debt even higher, in the form of extending tax breaks and possibly some new spending items. Unless Congress agrees to spending offsets, those programs will require even higher levels of federal borrowing.

"Most members have acknowledged that our debt is too high, and everybody would acknowledge that borrowing more contributes to inflation," she told FOX Business. But she said when presented with the idea of no new borrowing, "they start thinking about all the things they might want in a year-end deal."

New borrowing would be needed if Congress agrees to extend some tax cuts beyond their expiration date. For example, companies are currently allowed to deduct the full cost of business equipment expenses immediately, but this 100% bonus depreciation rule will start to phase out in 2023. Other tax breaks have already expired but could be renewed, such as the ability to immediately deduct research expenses instead of stretching out that deduction over several years.

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Extending those breaks would create a revenue shortage that would have to be made up with new borrowing, and the same holds true for decisions to expand federal spending programs. One of those programs could be new military aid to Ukraine, or a broad increase in spending authorization across the entire government when a full-year appropriations bill comes up.

MacGuineas said these sorts of priorities could amount to hundreds of billions in new spending that would only spark more demand and keep inflationary pressures elevated.

Her organization is pushing members of Congress to agree to no new borrowing for the rest of the year, and then taking a serious stand against any further expansion of the $31 trillion national debt. But the temptation among Republicans and Democrats to approve these programs is so great that they might pass regardless of the inflationary damage they might do.

MacGuineas said that in theory, it’s never been easier to show people the dangers of runaway federal spending. For years, more spending didn’t carry any immediate cost to the average American because the government could borrow at rates close to zero.

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Now, however, rising interest rates mean the government is about to spend record amounts just to service the national debt. The U.S. spent more than $500 billion on debt interest payments in fiscal year 2022, an amount that is more expensive than most federal departments and rivals the $700+ billion Defense Department.

Borrowing more to service the debt is inflationary, and finally gives American families a direct reason to support less federal spending.

"For years people have been able to dismiss concerns about the debt because you couldn’t see the immediate downside of it," she said. "Now we see the debt can cause tangible harm due to inflation."

When debt matures, the government fills the hole by borrowing more money, and new borrowing will come with much higher interest rates. MacGuineas’s group estimates that for every 1% rise in interest rates above expected levels, the government will spend $240 billion more each year to service the trillions it owes.

About a third of America’s short-term debt is expected to be refinanced in the coming year, which means much higher interest payments, and that means even more borrowing. 

MacGuineas described it as a "vicious cycle" in which Congress spends, inflation rises, and the Federal Reserve is forced to raise rates in order to temper inflation. Those higher rates raise the cost of the national debt and requires even more borrowing to service higher interest payments.

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All of that, she says, is inflationary.

"The more borrowing we have, the more we’re putting that into the economy, [and] that is fueling inflation and making the problem worse," she said on Mornings with Maria this week. "Every dollar of savings that we can have by reducing deficits from what they otherwise would be helps with inflation, and this continued borrowing is really jeopardizing American families."

MacGuineas said getting the situation under control will require a commitment to fight for a balanced budget and to take on new spending priorities by cutting spending in other areas. But she acknowledged it’s a steep curve for Congress.

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This year, for example, the Democrat-led House and Senate Budget Committees didn’t approve a budget for fiscal year 2023, which started Oct. 1.

"It’s as though the budget committees didn’t exist," she told FOX Business. "We need to bring back a seriousness of purpose."