Is Congress helping or hurting inflation?
- The Inflation Reduction Act will be estimated by the Congressional Budget Office as reducing the deficit over the budget window; Meanwhile, Congress is completing action on the CHIPS and Science Act, which would add an estimated $270 billion to the deficit over the next decade.
- Combined, the two bills would modestly reduce the deficit over the next decade – essentially, CHIPS and the Science Act would absorb the majority of the Inflation Reduction Act’s deficit reduction.
- For four years, 2024-2027, the bills combined would increase the deficit by more than $10 billion a year.
- It should be noted that, combined, the bills would not begin to significantly reduce the deficit until 2028, well after one would have hoped that the Federal Reserve would have brought inflation back to its target.
On Wednesday, Senator Joe Manchin surprised much of Washington, DC by announcing that he had accepted the final version of the Build Back Better Act (BBBA). Sign of the times, the BBBA has been renamed the Inflation Reduction Act (IRA). The IRA is also more modest in its ambitions than past efforts and does not rely on nearly $2 trillion in additional borrowing like previous iterations did. Instead, the Congressional Budget Office (CBO) will estimate that the IRA reduces the deficit over the budget window. Supporters of the IRA present this change, and the legislation in general, as anti-inflationary. But virtually in the same breath, many senators could defend their support for the CHIPS and Science Act (HR 4346), which would add an estimated $270 billion to the deficit over the next decade. Combined, the IRA and CHIPS bills would, in some years, be roughly budget-neutral or deficit-reducing. But for four years, those bills would add up to add to the deficit. To the extent that Congress can significantly affect the rate of inflation, do no harm would seem to be a first principle. The combined effects of the deficit are relatively modest, and one would not want to overstate the inflationary risks these new deficits present, but a simple math makes it clear that Congress is certainly not helping the cause.
Estimation of budgetary effects
As of this writing, CBO has not released a cost estimate for the IRA. An approximation of the budget effects of the bill is nevertheless possible given the availability of the legislative text, summaries and estimates from the CBO and the Joint Committee on Taxation (JCT) of earlier versions of the BBBA. Similarly, the CBO prepared a cost estimate for the CHIPS and Science Act, but did not detail or estimate the spending effects of the $200 billion in appropriations authorizations included in the bill. Assuming these funds are appropriated as authorized, the additional spending will have a significant impact on the deficit outlook. Indeed, permissions in CHIPS commit almost triple the amount of taxpayer funds than do direct taxation and semiconductor subsidies in legislation. The CBO has a useful tool for estimating the spending (spending) effects of authorizations, which was used here to estimate the total potential shortfall effect of the CHIPS bill.
Table 1: Approximate budget effects of the Cut Inflation Act and the CHIPS and Science Act
Combined, the two bills would modestly reduce the deficit over the next decade – essentially, CHIPS will have absorbed the majority of the IRA’s deficit reduction. For four years, 2024-2027, the bills combined would increase the deficit by more than $10 billion a year. These bills were somewhat politically tied, with Republican support for CHIPS and science law theoretically tied to the abandonment of the BBBA. CHIPS is certainly not the only deficit-funded bill enacted by this Congress, but CHIPS and the IRA now essentially run through Congress in tandem, so the claim of deficit-funded warmongering theoretically embodied in the IRA is somewhat offset by contemporaneous loss spending in CHIPS. It should be noted that, combined, the bills would not begin to significantly reduce the deficit until 2028, well after one would have hoped that the Federal Reserve would have brought inflation back to its target.
These estimates are modest in their assumed accuracy and are presented here to approximate the general direction and order of magnitude of the deficit effects of these bills, keeping in mind their potential impact on inflation. The policy estimates come from the BBBA’s CBO/JCT estimate as passed by the House of Representatives, while the Affordable Care Act grant estimate is somewhat of an awkward budget placeholder. Nonetheless, the extent of the inaccuracy of this estimate relative to the CBO’s next cost estimate is likely to be minimal. It is also important to note that this is not an attempt to replicate a CBO cost estimate. Indeed, according to the CBO rating, neither the $207 billion in revenue assumed to be generated by the $80 billion increase in Internal Revenue Service (IRS) funding, nor the $190 billion in expenditures associated with the CHIPS and Science Act, would not “mark” or count. The CBO’s scoring rules would only count the $80 billion in spending for the IRS and leave out discretionary spending in CHIPS. Yet, since the objective of this exercise is to assess the ultimate impact on the deficit and the potential for inflationary risk, it is appropriate to include the two non-assessable elements.
Proponents of the IRA rightly point out that the combination of taxes, expenditures, and other IRS agents in the bill will contribute to the estimated deficit reduction. In isolation, it is a mathematical reality. The IRA is not isolated, however, but is more than usual linked to CHIPS and science law, both politically and in terms of timing. While the bills don’t combine with the multi-trillion dollar deficits that have been in vogue lately, they nevertheless make it clear that Congress may not be pushing in equal and opposite directions against the Federal Reserve at this time. , but that certainly doesn’t help.
The author would like to thank Jackson Hammond, Tom Lee and Tori Smith for their assistance.