Trump's Budget Signals the Absence of a Realistic Agenda
One of the reasons Donald Trump prospered during the presidential campaign was because he created the impression that he would bring fresh thinking and new ideas to the federal government. He said he could cut taxes, increase defense spending, protect Social Security and Medicare benefits, increase support for veterans, and balance the budget by bringing a business perspective to eliminating waste and unnecessary spending. He said he would find ways to cut costs that never occurred to his predecessors. Many voters wanted to believe him.
The release of the administration’s first full budget this week should lay to rest for good the notion that Trump has an imaginative plan for painless cost-cutting that will help him fulfill his campaign promises. There is no such plan, never was, and never will be.
Instead, the budget OMB Director Mick Mulvaney presented this week is the predictable result of a fiscal policy that is entirely divorced from reality. Because it is based on so many flawed assumptions, the plan is more likely to result in policies that make the budget outlook worse rather than better.
The administration has been in place now for four months, and one of its top priorities is a major tax cut and tax reform. The president has said repeatedly that he would like to sign into law one of the largest tax cuts in history. And yet the budget plan provides no details at all on the administration’s tax plans. Instead, it assumes a revenue-neutral tax reform, which will only occur if higher growth offsets some of the revenue loss associated with lower rates. Separately, the budget also assumes $2 trillion in additional revenue from the growth effects of the administration’s policies, of which tax reform must be considered the centerpiece. In other words, instead of building into the budget forecast a major tax cut, as the president has touted, the administration says its tax policies will result in an additional $2 trillion in revenue over the next decade. This is what is known as a heroic assumption.
The administration claims it will get this additional revenue because its policies will push economic growth up from just under 2 percent annually in recent years to 3 percent per year beginning in 2021. The Congressional Budget Office (CBO) assumes the economy will grow 1.9 percent annually starting in 2021, and most economic forecasters expect growth to hover around 2 percent for the foreseeable future.
Higher growth is essential for an improved fiscal outlook. But the Trump administration hasn’t proposed anything that would justify such a large deviation from the consensus forecast. The administration says it is pushing for pro-growth tax reform, but that’s not the same thing as actually proposing a pro-growth tax reform plan. At this point, projecting 3 percent growth in the outyears of the budget is little more than wishful thinking.
The budget increases defense spending modestly in 2018, by 4.6 percent compared to the enacted level of funding for 2017. Nonetheless, the budget assumes defense spending will continue to fall as a percentage of GDP, from 3.4 percent in 2017 to 2.4 percent in 2027, which would be the lowest level of defense spending relative to the size of the national economy since before World War II, in 1940. Given the many developing threats to national security, it seems more likely that defense spending will remain closer to the post-war historical average.
The Trump budget stays true to the president’s commitment to stay away from major reforms in Social Security and Medicare. This commitment forced the administration to focus its cost-cutting on the rest of the budget, where there is room for some savings, especially in the aftermath of increases pushed through Congress during the Obama administration. But because the administration wanted to show it balanced the budget within ten years, the administration’s planned cuts outside of defense, Social Security, and Medicare are all out proportion to what is reasonable or realistic.
In 2017, the federal government will spend $619 billion on non-defense appropriated accounts. This is the portion of the budget that pays for the myriad domestic federal agencies that get their funding through the annual appropriations process, such as the Department of Education and the National Institutes of Health. The Trump budget assumes there will be a downsizing of these accounts to $601 billion in spending in 2018 and to $429 billion in 2027, or $190 billion below what is being spent this year. Congress already rejected the administration’s proposed cuts to these programs for 2017; the same is almost certain to be true for 2018. And there is zero chance of enacting what would amount to a 40 percent cut in real terms by 2027.
The budget also assumes massive savings in the Medicaid program. The budget’s summary tables show deficit reduction of $250 billion over 10 years from repeal and replacement of the Affordable Care Act (ACA). This is more deficit reduction than CBO projects would occur if the House-passed American Health Care Act (AHCA) became law. Embedded in CBO’s estimate is a reduction in Medicaid spending of $834 billion over 10 years, from a rollback of the enhanced federal matching funds for expanding coverage under the ACA. Implicitly, the Trump budget assumes this reduction in Medicaid spending and then also assumes an additional reduction in the program of $606 billion over a decade. In total, the budget is proposing to cut Medicaid by $1.4 trillion over 10 years.
Medicaid is badly in need of reform. The House-passed AHCA would move away from open-ended federal matching payments to the states by placing a per person cap on federal financing of the program. This reform would bring much needed discipline to the program. But the Trump budget takes this important reform and turns it into a fictional exercise to claim unrealistic levels of savings. Like the other cuts in the budget, the added Medicaid savings assumed in the budget plan is there for only one reason: to allow the administration to claim it has proposed a balanced budget.
The first year of a new administration is normally the time to advance an ambitious legislative agenda. Unfortunately, the Trump administration has released a budget plan that is more of a political statement than something designed to bring about a change in policy. Indeed, there is very little in the Trump budget that will be taken seriously in Congress, much less passed as legislation.
All of this points to the lack of a concrete and realistic agenda. The budget could have been used as a way for the president to present those creative and new ideas for government reform that he promised as a candidate. Instead, the administration’s plan is disconnected from reality and seems likely to have no effect on policymaking whatsoever. The Trump budget is therefore a significant missed opportunity for the new administration.
James C. Capretta is a resident fellow and holds the Milton Friedman chair at the American Enterprise Institute.