The biggest single difference between President Donald Trump’s new budget and his first one nine months ago is this: The White House can no longer hide the immense deficits it would create, not after the tax cuts and military buildup Trump championed and secured.
Documents released Monday show a pronounced drop in total government receipts from 2018 to 2022 when compared with the revenue numbers the White House presented for the same years last May. That includes about $740 billion less from corporate, estate and individual taxes in the same five years, a number that tracks with what the Joint Tax Committee had warned of in December.
The result is to exacerbate the nation’s already tenuous fiscal situation. Even if Trump were to get all the spending cuts he wants, plus his ambitious 3 percent growth, deficits over the next decade would total $7.1 trillion. That’s twice what the Office of Management and Budget forecast last spring.
Indeed, the level of red ink could be understated, since all these calculations rest on very favorable economic assumptions and do not include a full accounting of the recent spending increases and additional tax cuts enacted in recent weeks.
Trump is ordering Republicans back to the trenches to fight nondefense appropriations. But he himself shows little appetite still for taking the lead in a major way on more difficult entitlement issues.
The bottom line is that Congress and the president, like Wall Street already, will soon be keeping a closer eye on Treasury bond rates.
Calculations by POLITICO show that the combination of tax cuts and spending increases approved in the past 60 days could increase government borrowing by over $900 billion through fiscal 2020, a nearly 50 percent increase from prior deficit estimates by the Congressional Budget Office.
This being Washington, much has already been written about the hypocrisy of Republicans preaching balanced budgets and then running up huge deficits to try to save themselves in the midterm elections. But these numbers have real consequences, quite apart from politics. And the whole country has been pulled into a gamble that Treasury will continue to enjoy what’s been a very favorable run in low interest costs.
On this score, Trump has actually lowered his interest rate projection from last year’s budget, thereby reducing his borrowing costs. This may prove a smarter bet than his growth projections. But the nation’s debt is already so large that the CBO estimates that an increase in rates of 1 percentage point can add about $1.6 trillion to deficits over 10 years.
After Ronald Reagan’s tax cuts in the 1980s, deficits exploded in the same range as Trump’s now, when calculated as a percentage of the economy, or gross domestic product. But Reagan’s famous “riverboat” gamble came when the total national debt was a fraction of what it is today. Trump is pushing the envelope when debt is already near 80 percent of GDP, leaving far less room to maneuver if the economy turns downward.
Moreover, Congress has changed too, especially the GOP. In the 1980s, there was a genuine ethic among leading Republicans in the Senate that they must try to rein in deficits, even if it meant increasing taxes. That spirit seems entirely gone now.
Deficits seem less the enemy than government itself. And in the recent spending deal, the GOP opted to simply blow up the Budget Control Act of 2011 to secure the increased defense money it wanted.
Longtime budget watchers like Maya MacGuineas, president of the Committee for a Responsible Federal Budget, are aghast.
“It is foolhardy and dangerous to run deficits this large in an expansionary time when we should be getting our debt under control so we are ready for the next downturn,” she said in an interview. “It is just a political unraveling of understanding that budgeting is about choices.”
“When we went into the downslide of 2008, luckily our debt was below 40 percent of GDP. That will not be the case next time,” MacGuineas added. “Fiscal responsibility is about creating rational rules that reflect that budgeting is about trade-offs and choices. And we’ve entered a new political economy where everyone’s pretending that no longer matters. It’s inconvenient.”
Economists and politicians alike don’t know what happens next. There’s all the edginess of breaking new ground. But also, as with Faulkner’s famous line, there is a sense that the past “is not even past.”
Former Federal Reserve Chairman Ben Bernanke is long gone, but Trump allies are still blaming him as the financial markets struggle to adjust to the Fed pulling back from its role in keeping down interest rates. At the same time, Democrats can’t shake the memories of how the Republican animus toward President Barack Obama frustrated his efforts — in tougher economic times — to implement some of the same corporate tax changes and investments the GOP has pushed forward now.
“Mr. Trump’s instinct as a real estate guy is always to want lower interest rates. But the more he demands low rates amid faster economic growth, the higher rates he is likely to see and sooner than he imagines,” was the recent advice from The Wall Street Journal editorial board, a friendly corner for the administration. “Faster economic growth and a tight labor market will mean rising wages for the working men and women who elevated him to the White House. Stocks will eventually adjust and follow a growing economy, and Mr. Trump needs to let the Fed continue on its path back to normal.”
Jason Furman, a chairman of the Council of Economic Advisers during the Obama administration, is sanguine about interest rates. “We always knew interest rates were going to rise,” said Furman, who now teaches at Harvard. “It might just be we are getting there a bit faster, not that we’re going to rise even further.”
For Furman, the greater flaw in the president’s budget is the “crazy” high growth rate assumed by the White House. And even under the president’s growth scenario, Trump’s deficits still race ahead, breaking into the range of 5 percent of GDP — or higher.
“It’s going to be 5 percent of GDP next year; it’s heading up to 7 percent of GDP,” Furman said. “That’s the largest deficits as a share of our economy outside a major war or a major recession. So it’s just not sustainable, period.”
The figure hovers below the 5 percent mark in the budget documents released Monday. The current fiscal year, which ends Sept. 30, is expected to show a deficit equal to 4.4 percent of GDP. In fiscal 2019, it will rise to 4.7 percent, and in fiscal 2020, to 4.5 percent.
But those deficit-to-GDP projections could easily prove too low, once the added costs of the latest tax cuts and spending increases are added to the mix. Budget director Mick Mulvaney has all but conceded that next year’s deficit will top $1 trillion, a tipping point Republicans loudly denounced when it happened under Obama.
Down the road, Mulvaney sees the picture improving by the end of the decade. But his chances of success rest very much on two planks: robust economic growth and persuading Republicans in Congress to backtrack on recent deals to raise domestic spending.
Toward this end, a hastily prepared addendum attached to the budget documents spells out where Mulvaney would like the extra domestic dollars to go and his belief that the new caps are excessive. His aggressive posture is not entirely a surprise given his record, and Democrats had some inkling that this might happen as the negotiations were concluded.
In the course of the talks, aides said, proposed drafts of the agreement often began along the lines of, “The President and four leaders of Congress agree.” But any reference to the president disappeared before the end, a change that Republicans say was meaningless but appears important at least to Mulvaney.
For the current fiscal year, Mulvaney’s leverage will be limited because House-Senate negotiators are already drafting a single, governmentwide appropriations bill, which will make it harder to separate out defense vs. nondefense dollars. But the budget director seems bent on a fight in the fiscal 2019 appropriations cycle, when Republicans could send defense bills to Trump first and the president would then be free to use his veto to get closer to the level of spending he would accept on the remaining domestic bills.
These are familiar battle lines going back to the long, hot summer of 2011. It was then that House Republicans pressed Obama to accept new spending caps, cutting below his 2012 budget requests in return for GOP votes to raise the debt ceiling and avert default.
Obama acquiesced, gambling that Republican defense hawks would soon chafe at the same caps and bring both parties to the table on a deficit reduction plan including new taxes. In fact, the exact opposite has happened in the space of two months: big tax cuts and the 2011 agreement blown up to get the defense dollars without any significant deficit offsets.
“It was so obvious to us that that would work,” said Furman, looking back. But nothing now seems obvious, except red ink.
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