Six Things You Need to Know About the New Budget Numbers
This fall’s Treasury end-of-fiscal-year budget accounting is an occasion for anxiety even greater than in the past.
Here are six sad takeaways:
1. The deficit is rising unsustainably. The budget deficit is piling up our nation’s accumulated debt faster than our collective income (gross domestic product) is growing. The fiscal 2017 deficit was $666 billion, or 3.5 percent of our nation’s GDP, out of which we must service that debt. The deficit in 2018 was $779 billion, or 3.9 percent of GDP. The debt is now close to 80 percent of the GDP, and deficit growth will accelerate in years to come.
2. The economy is growing. Superficial good news: Over fiscal 2017, the economy grew by 2.2 percent; in fiscal 2018, it grew by 2.9 percent. So economic growth was better in 2018 than in 2017. Why, then, was the deficit worse?
3. Because revenues are not keeping up. Between fiscal years 2017 and 2018, revenues grew by all of $14 billion, or 0.4 percent, even though the economy grew by 2.9 percent. Outlays grew just a little faster than the economy, at 3.2 percent. This will confront budget watchers with a Rorschach test. Is the deficit swelling because revenues are not growing, or because spending is growing too fast? Of course, if revenues are not growing, the deficit would go up if spending grew at all. Furthermore…
4. There is no sign that the 2017 tax cuts will pay for themselves. No one knows the future, and so no one can rule out a revenue renaissance. But there are no positive signs so far. Few tax cut enthusiasts appear to understand just how much more growth it would take to bring revenues all the way back after a $1.5 trillion to $2.5 trillion tax cut. Americans are working flat out as it is. Assembly lines and retail stores aren’t going to run longer hours just so that people can work more. Salaried workers won’t be paid more if they do work longer hours. Investors have already pocketed big tax cuts and are highly likely to sit back and enjoy the money without taking more risks.
5. But beyond that, the tax cuts merely paying for themselves is not enough. Prior to the 2017 tax cuts, the budget deficit and debt were growing unsustainably. Even if the 2017 tax cuts do pay for themselves, the budget deficit and debt will still be growing unsustainably.
And that leads to a troubling political scenario.
6. This nation will not begin to address its budget problem for at least six years. Our nation’s policies follow our politics. And our politics today are heading into the wall.
The president says constantly that today’s economy is the best in history, because of his tax cuts. He proposes more. And he has ruled out spending cuts in Social Security and Medicare, and wants increases in defense. Those spending categories (plus interest on the debt, which cannot be cut directly) account for 96 percent of all the spending growth from 2017 to 2023 in the president’s own budget. Those policy positions form the cornerstone of his re-election campaign.
On the other side, no Democrat will risk campaigning on a tax increase. (See Mondale, Walter, 1984.) And, on principle, no Democrat will campaign on cutting Social Security or Medicare if his or her Republican opponent does not.
There you have it: Social Security, Medicare, and the growing debt-service burden — which comprise virtually all of the spending increases for the next presidential term — and the taxes that would potentially pay for them are all off the table for presidential candidates from either party, unless the winner breaks his or her word. The Congressional Budget Office says the 2025 deficit will be $1.35 trillion, and the debt will reach 91.5 percent of the GDP.
Some say that financial market players remain calm about the debt explosion because they believe that sooner rather than later the United States will face up to reality and do the right thing (as our nation always has). What if those market movers put two and two together when both presidential candidates pledge that they will borrow away until 2025 — at the absolute earliest? With the debt outlook already so bleak, and so vulnerable if interest rates rise, there could be a financial crisis in our future.
Joseph J. Minarik (@JoeMinarik) is senior vice president and director of research at the Committee for Economic Development. He served as chief economist at the White House Office of Management and Budget for eight years under President Clinton. He previously worked with Sen. Bill Bradley (D-NJ) on his efforts to reform the federal income tax, which culminated in the Tax Reform Act of 1986. He is coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”