(March 12): The White House expects the US economy to cool markedly in 2024 and inflation to remain stubbornly, if modestly, above the Federal Reserve’s (Fed) target.

President Joe Biden’s proposed budget for fiscal year 2025, released on Monday, assumes economic activity will increase 1.7% in calendar 2024, well below the 2.1% median forecast of economists surveyed by Bloomberg.

Following a surprisingly strong 2023 with 2.5% growth, most forecasters expect a slower pace this year as high interest rates continue to pinch the economy. Projections for the budget were finalised in November, before the robust 2023 gross domestic product (GDP) figures were known.

While the growth projections fall short compared to the Bloomberg survey — which included responses from 72 economists — one of Biden’s top economic aides said that the administration expects higher growth than many other forecasters do when looking five to 10 years out.

“That’s because we include the pro-growth effects of our policies, including investments in human and physical capital, along with affordable child care,” Jared Bernstein, the chair of the White House Council of Economic Advisers, said on a call with reporters.

Each spring, the president and his staff lay out a proposed budget for the fiscal year, which runs from Oct 1 to Sept 30. It’s widely considered dead on arrival at Congress — as Republicans control the House — which holds the ultimate authority over taxing and spending in the US.

But it does serve as an election-year guide to what the Biden administration’s priorities would be if he’s re-elected and Democrats can secure control of Congress in November. If the Biden budget became law, for example, parents could get an increased child tax credit and homebuyers a tax credit worth US$9,600, corporate taxes would rise and billionaires would be charged a minimum tax rate of 25%.

Inflation, unemployment

Officials were also slightly more pessimistic when it comes to inflation, expecting the consumer price index (CPI) to average 2.9% in 2024 compared to 2.7% in the Bloomberg survey. Neither forecast sees the CPI reaching the Fed’s 2% goal in the next two years, though policymakers base that on a separate index that has historically run slightly lower than the CPI.

The projections for unemployment were roughly in line with economists’ expectations, rising to 4% this year and next.

Compared to earlier White House projections for 2024, the administration now expects much higher borrowing costs. A year ago, they expected three-month Treasury bills to average 3.8% in 2024, and 10-year notes at 3.6%. That proved overly optimistic.

The administration now anticipates those rates to average 5.1% and 4.4% this year respectively.

Higher rates, driven by the Fed’s quest to stifle inflation, have already bloated federal outlays meaningfully in the past year and are expected to contribute significantly in coming years. The weighted average interest rate on outstanding US interest-bearing government debt was 3.2% at the end of February — the highest since May 2010 and more than 1.6 percentage points higher than its low point in January 2022.

Moody's projections show that the US will pay US$4.7 trillion (RM22.01 trillion) in real net interest from 2025 to 2034. Interest as a per cent of GDP is expected to double from 0.7% this year to 1.4% by 2032.

That will squeeze other programmes in the federal budget. Beginning in 2026, interest payments will likely take a larger slice of budget outlays than the military or non-defence discretionary programmes.

Overall, the White House projections show annual fiscal deficits sustained above US$1.5 trillion over the next decade, with US$2 trillion for 2033. The deficit as a share of GDP is forecast to average 4.6% of GDP from 2025 to 2034.

Bernstein defended the deficits by focusing on a measure that Treasury Secretary Janet Yellen has touted as a better way to gauge the sustainability of the nation’s debt burden: the cost to service the debt as a percentage of GDP when adjusted for inflation. That measure is expected to remain below 2% for the next 10 years.

Bernstein called that “well within the historical range”, and “a positive indicator of fiscal responsibility”.