There’s a certain amount of policy uncertainty surrounding every incoming president. Presidential candidates often say vague and contradictory things on the campaign trail to give themselves room to maneuver once in office. But even in this context, Donald Trump stands out. His statements during the campaign were so devoid of factual support and inconsistent that it is impossible to know for sure what he will do as president.
Under normal circumstances, one might expect the federal budget process to begin to clarify things. While politicians would like to be all things to all people, there’s only so much money to go around. Budgets can be disciplining devices, forcing policymakers to confront the reality of limited resources and thus to separate what they consider to be truly important from other, lesser priorities.
During the campaign, Trump often railed against the run-up in debt that occurred during the Obama presidency, suggesting that it was an indicator of national decline that he would reverse if elected. And he has frequently said that his skills as a businessman and negotiator would bring discipline to the sprawling enterprise that is the federal government.
But other key commitments featured prominently in Trump’s general election campaign point to large increases in federal deficits in the years ahead. He has promised a tax cut that could add $2.6 to $3.9 trillion to the federal debt over the next decade. He also has proposed to reverse cuts in defense spending that could add another $0.5 trillion to the debt over 10 years, and to increase spending on infrastructure that some suggest could cost $1 trillion over the same period (although the Trump campaign says it can be done through less costly public-private partnerships).
At the same time, Trump has said that he will oppose any significant changes to Social Security and Medicare — by far the largest spending programs on the domestic side of the federal budget.
Trump will be inheriting from President Obama a fiscal outlook that will be challenging even without additional tax cuts and spending increases. According to the Congressional Budget Office (CBO), the federal government will run a cumulative, 10-year deficit of $8.6 trillion over the period 2017 to 2026 under current law and policies. Those deficits will push total federal debt up to $23 trillion in 2026, or 85 percent of GDP. By comparison, in 2008, federal debt equaled 39.3 percent of GDP.
Beyond 2026, the fiscal situation will continue to deteriorate, as the population ages and health-care spending rises more rapidly than economic growth. CBO expects federal debt will exceed 100 percent of GDP in 2033, and 140 percent of GDP in 2046.
Is there anything Trump could do to keep federal debt from rising to levels not seen before in U.S. peacetime history? Trump himself has suggested that he will use his negotiating skills to drive down federal costs in various parts of the budget, including drug spending in the Medicare program and waste at the Pentagon.
Medicare drug costs could be reduced through enforcement of tighter price controls, but the savings — at best $100 to $150 billion over a decade — would put a small dent in projected deficits. Moreover, many Republicans in Congress think these kinds of price controls are counterproductive.
At the Pentagon, countless efforts over many years already have tried to eliminate waste and cut the size of the unwieldy bureaucracy, with some incremental results. There’s little reason to expect renewed efforts to cut waste here will somehow discover hundreds of billions of dollars in easy-to-achieve savings in defense accounts.
There will surely be efforts to make additional reductions in spending in the non-defense appropriated accounts, too. But this slice of the federal budget is already small and shrinking. And for every program that politicians want to cut there are probably two or more that Democrats and even some Republicans would like to see grow. There is simply no large-scale savings available from the appropriated side of the budget.
These budget constraints might seem like an unsolvable dilemma for the incoming Trump team, but they could always do what other policymakers have done when faced with a similar problem: Fudge the numbers. This would be the path of least resistance.
Politicians and voters both like to think that, with the right policies, we can solve our fiscal problems with accelerated economic growth and the elimination of “waste” in federal spending without harming anyone. If that were true, there would never be any need to cut back on popular programs or raise taxes.
Of course, there’s no evidence to suggest that the country is on the verge of an economic boom that would create a gusher of revenue, or that Trump’s team has a secret plan to root out waste that others could never stop. Trump’s rhetoric on the campaign trail indicates that he is susceptible to the temptation to wish away future fiscal problems.
CBO’s forecast projects real GDP will be 19.2 percent higher in 2025 compared to 2016, assuming current law and policy. The Tax Foundation expects that enactment of the Trump tax plan would increase GDP in 2025 by another 7 to 8 percent above the CBO current law forecast. That’s about 0.9 percent additional growth per year. Trump and his advisers have said repeatedly they expect their policies to push annual GDP growth up to at least 4 percent, or double what CBO assumes in its forecast. If that were to occur, federal revenue would rise rapidly, but still not enough to offset the revenue loss from a large tax cut.
It would be dangerous to bank on sustained 4 percent annual real growth over the coming decade or even over the next five years. The U.S. economy has not sustained 4 percent annual growth over a five-year period in nearly two decades. In fact, such growth has been the exception, not the rule, since 1970.
Saying it will be hard to achieve 4 percent annual growth in real GDP does not mean stronger growth should not be the top priority of the incoming administration. It should be. More rapid economic growth is precisely what’s needed to push wages up for those Americans who have seen their incomes remain flat over the past 25 years. But assuming growth will occur at levels that are well beyond recent experience — especially before there is any evidence that growth is even accelerating beyond what has occurred during the past several years — would very likely result in fiscal problems that could needlessly slow growth, and thus hold back the wage gains that so many households are hoping to see.
Trump could supplement a rosy economic projection with another old budgetary trick: Promise unspecified savings in the outyears of the projection period. For instance, a Trump administration could empower a panel to root out waste and inefficiency in the federal government, much like President Reagan’s Grace Commission in the 1980s. The Grace Commission had some success, but it would be hard to argue that it put a major dent in federal spending. A new effort is likely to find some success, too — the federal government is a target rich environment for wasted resources — but not nearly enough to balance the budget or even offset large tax cuts.
There’s some speculation that the Trump team might try to soft pedal the fiscal consequences of its policies by declining to submit a budget plan to Congress in 2017. That would be unprecedented, and probably wouldn’t work anyway. First, Congress will find it difficult to move forward with Trump’s agenda without first passing a budget resolution that provides the framework for a tax cut and the administration’s spending priorities. True, Congress can also rely on optimistic assumptions about growth and unspecified future savings. But, eventually, CBO will issue updated projections, and neither the Trump administration nor congressional Republicans will be able to control the assumptions that are used to build that projection. If the Trump tax cuts and spending increases are enacted in full, CBO is sure to project a rise in debt that pushes the U.S. economy closer to a crisis. The Democrats and media will then seize on this information and make it a prominent part of their planned resistance to the GOP’s agenda.
In 1981, President Reagan put in place a plan for cutting taxes, increasing defense spending, reducing spending on domestic programs and agencies, deregulation, and sound monetary policy to break the back of crippling inflation. It was the right plan at the time. But next year will not be 1981 all over again. The economy is already growing and is currently at or near full employment. The U.S. is also moving inexorably toward large and unsustainable fiscal deficits, driven by increases in entitlement spending. The time is right for tax reform and the right kind of pro-growth deregulation. But this agenda should be coupled with serious and far-reaching reforms of the big federal spending programs that are driving up deficits and debt.
Economic growth is crucial, of course, but it won’t be enough to rid the country of its fiscal problems.
If the 2016 campaign is any indication, GOP leaders are likely to procrastinate and avoid offering serious solutions to the problem, as the Democrats did when they had control of government in 2009. The result would be a steadily worsening budget outlook over the coming years, or even a fiscal and economic crisis. If a crisis occurs, policymakers would be forced to enact spending cuts far more painful than those required today. The hope must be that the Trump administration and the new Congress will steer clear of gimmicks and rosy assumptions and instead take the steps necessary to head off the budget problems that cannot be wished away while they still have the chance to do so.
James C. Capretta is a resident fellow and holds the Milton Friedman Chair at the American Enterprise Institute.