Biden's budget plan swells U.S. debt before tax hikes kick in

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WASHINGTON, May 28 (Reuters) - U.S. President Joe Biden's $6 trillion budget plan foresees a big near-term increase in U.S. debt to fund his plans to reduce inequality, combat climate change, rebuild U.S. infrastructure and invest in new technologies, but counts on higher tax revenues to reduce deficits in the longer term.

The budget proposal released on Friday builds on a partial "skinny budget" the White House announced last month that sought spending increases for addressing climate change, fighting cancer and boosting underperforming schools. read more

Following are some takeaways from Biden's first comprehensive spending blueprint for fiscal year 2022 - a proposal that faces strong opposition from Republican lawmakers and will be subject to months of negotiation:

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ADDING TO DEBT

Biden's 10-year budget plan would add $14.53 trillion to the nation's debt between 2022 and 2031, but it foresees narrowing annual deficits as proposed tax hikes on rich individuals and corporations, and ramped-up tax enforcement, boost revenues.

The proposal foresees total public debt reaching 117% of gross domestic product by 2031, down from highs seen during the COVID-19 pandemic, but still well above historical levels.

However low interest rates mean that the cost of borrowing will be negative through 2028, and will remain below historical levels through 2031, officials said.

TAXES

The plan foresees paying for Biden's spending priorities by increasing the amount of taxes paid by the largest U.S. corporations and rich Americans. It proposes eliminating long-standing loopholes, including lower taxes on capital gains and dividends for the wealthy.

The Biden administration's proposals to raise taxes on corporations and wealthy Americans would increase net revenues by nearly $2.4 trillion over a decade, after backing out hefty tax deductions and credits to support clean energy, children and families, the Treasury said on Friday. read more

The plan allows tax cuts enacted by former President Donald Trump for individuals to expire in 2025.

Acting Office of Management and Budget Director Shalanda Young said Biden remains committed to not raising taxes on individuals making less than $400,000, and there is plenty of time to revise the tax code before those tax cuts expire.

“The president will use the time between now and that expiration in 2025 to work with Congress to continue reforming our tax code so that it asks the wealthy to pay their fair share, raising the right amount of revenue, and protects the low- and middle-income families,” Young said.

ROSIER ECONOMIC ASSUMPTIONS

Cecilia Rouse, who chairs Biden's Council of Economic Advisers, told reporters the economy had improved sharply since the forecasts underlying the budget were locked down in early February, bolstered by rescue spending, a decrease in unemployment and progress on COVID-19 vaccinations.

The administration will revisit those forecasts later this year, but did not revamp them ahead of the budget release, administration officials said.

For instance, the budget assumes real GDP growth of 5.2% in 2021 and 3.2% in 2022, but the consensus forecast for GDP growth in 2021 has already increased to 7%.

Even smaller percentage-point differences would result in trillions of additional cumulative economic output over a decade, Rouse said.

Using the conservative estimates from February, the budget assumes U.S. GDP growth of 2% in 2031, compared to a Federal Reserve estimate of 1.8%.

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Reporting by Andrea Shalal and Jarrett Renshaw; Editing by Andrea Ricci

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