Biden Emphasizes Deficit Reduction in Bid to Pass Economic Agenda

The new emphasis on reducing the deficit comes after the Biden administration advanced several other spending plans last year—including the $1 trillion infrastructure law and $1.9 trillion Covid-19 relief law—that nonpartisan estimates found will widen the deficit. Lawmakers said the fresh budget approach, which a senior White House official called an “evolution” of the administration’s efforts on the issue, is part of the party’s struggle to strike a deal with Mr. Manchin on its broad domestic agenda.

After scuttling the House-passed version of the package in the 50-50 Senate, Mr. Manchin has in recent weeks said that Democrats should dedicate half of the bill’s tax revenue toward reducing the deficit, a step he suggested would temper decades-high inflation by pulling money out of the economy. But such a design would require the party to abandon yet more policy priorities—like child-care subsidies or universal prekindergarten—in the negotiations.

Some Democrats are hesitant to make that trade-off. “Certainly, Sen. Manchin has that as a goal, and I don’t think it’s something that we shouldn’t embrace,” said Sen. Bob Casey (D., Pa.). “I wouldn’t want that as a component part to crowd out some other priorities that I and others have, so we’ll just have to see.”

To some economists, the emphasis on reducing the deficit is misplaced, given that the annual shortfall is shrinking and interest rates remain low, by historical standards. Others see a growing urgency to rein in federal spending and borrowing, as decades-high inflation threatens to raise the cost of borrowing and the debt held by the public hovers near 100% of U.S. gross domestic product.

Congress approved more than $5 trillion of pandemic aid in 2020 and 2021, pushing the deficit to record levels. A sharp decline in federal spending for pandemic programs and an increase in tax revenue tied to an improving U.S. employment landscape have combined to reduce the deficit this fiscal year, which began in October, economists have said.

The deficit has narrowed by roughly $550 billion in the first five months of the fiscal year, compared with the same period last year, according to Treasury data, and is forecast to shrink to $1.15 trillion this year from roughly $2.8 trillion last year, according to the nonpartisan Congressional Budget Office’s most recent projections.

The White House says Mr. Biden’s policies encouraged the economic and jobs growth that pushed the deficit down. The White House last week sent a presentation to congressional Democrats highlighting the decline in the deficit.

“After four years in a row of increasing deficits before I took office, we’re now on a track to see the largest-ever decline in the deficit in American history,” Mr. Biden said Tuesday. “We’re proving that we can invest in the American people in a fiscally responsible way.”

Concerns about rising inflation have pushed up the yields on the benchmark 10-year Treasury note, which closed at 2.192% on Thursday. The government has spent 24% more paying interest on the public debt so far this fiscal year, compared with the same period last year, according to Treasury data. Much of that increase is due to higher costs for the government on Treasury inflation-protected securities, according to a senior Treasury official.

Still, Treasury Secretary

Janet Yellen

called the U.S. debt burden affordable at a recent event in Chicago. She said the White House budget for the coming fiscal year would also highlight declines in the deficit.

“Debt has gone up in the United States and debt relative to the size of the economy is higher than we’ve seen in a long time, but we’re in a world of historically low interest rates,” Ms. Yellen said. “And the burden of the debt in real terms has actually been negative in the last several years, so this is affordable.”

The White House and top Democrats argued throughout last year that the cost of their healthcare, education and climate-change package would be covered with attendant tax increases, reducing the deficit over time, though the CBO analysis found it would add to the deficit slightly over 10 years. Because the House bill temporarily funded many programs that Democrats wanted to later make permanent, Mr. Manchin rejected the administration’s analysis of its cost, saying the programs would ultimately widen deficits and exacerbate inflation.

Democrats would likely rely on tax increases approved last year in the House—including a 15% corporate minimum tax, higher taxes on U.S. companies’ foreign earnings, new surtaxes on very-high earners and enhanced tax enforcement efforts at the Internal Revenue Service to pay for the package—paired with fewer spending programs in a new bill aimed at reducing the deficit. Those tax plans, along with government savings generated by government-negotiated drug prices, raise nearly $2 trillion over 10 years.

William Hoagland, a senior vice president at the Bipartisan Policy Center and a longtime Senate Republican budget aide, said a combination of rising inflation and Mr. Manchin’s concerns have pushed the White House to re-emphasize their efforts to reduce the deficit.

“The politics clearly have forced [Mr. Biden] to do the pivot, but underlying that, I don’t think it was too hard for him to want to pivot, given his history of recognition of this issue,” said Mr. Hoagland, who worked with Mr. Biden on budget issues while he was in the Senate.

Whether legislation that cuts the deficit also ultimately fights inflation depends on how policy makers structure the bill’s spending, economists said. Even if it reduces the deficit overall, a bill that transfers tax dollars from high-income people likely to save the money to lower-income Americans likely to spend it could still heat up the economy, said Wendy Edelberg, an economist and the director of the Hamilton Project at the Brookings Institution.

“I think drawing the path from what fiscal policy might do to deficits and what deficits might to do inflation is a really circuitous path,” Ms. Edelberg said.

Write to Andrew Duehren at andrew.duehren@wsj.com and Amara Omeokwe at amara.omeokwe@wsj.com