2019 Budget Results Indicate Deterioration, Not Improvement
The 2017 tax cut will boost growth and incomes over the next decade, which should be sufficient to justify its passage by Congress. But many of law’s defenders go a step further and claim the law will pay for itself by raising growth enough to offset the federal revenue loss from lower rates. This was always an implausible argument. Now, actual budget data for 2019 is beginning to refute it.
During the first eight months of fiscal year 2019 (October through May), federal revenue was $2.275 trillion, or $50 billion more than was collected during the same eight month period in fiscal year 2018. That’s an increase of 2.3 percent. The largest source of higher revenue is tariffs, which are up $20 billion, or 81 percent, over their level in 2018. Without higher tariffs, federal revenue would be up only 1.4 percent compared to 2018. So far this year, individual income tax collections are up 1.5 percent, payroll taxes are up 4.5 percent, and corporate income taxes have fallen by nearly 9 percent.
The slow growth of revenue this year comes after a year of essentially no revenue growth. The government collected $3.329 trillion in revenue during all of fiscal year 2018, only $14 billion, or 0.4 percent, more than was collected in 2017.
Taking into account inflation, revenue growth over the last year and a half has been even less impressive. In nominal terms, revenue to this point in fiscal year 2019 is up 4.8 percent over the same eight-month period in 2017, but inflation since the mid-point of fiscal year 2017 has been 4.3 percent. In other words, real growth in revenue over a two-year period has been about 0.5 percent, which is far below the 2 or 3 percent increase that would be expected during a strong expansion.
Meanwhile, federal spending on the nation’s largest entitlement programs is surging. Outlays for Social Security, Medicare, and Medicaid are up 5.7 percent, 8.6 percent, and 3.7 percent, respectively, compared to the same period in fiscal year 2018. Combined, spending on just these three programs has grown $80 billion — or 6.2 percent — so far in 2019 compared to 2018 (after adjusting for some timing shifts), which means they have more than consumed the small increase in federal revenue that has occurred through May.
Total federal outlays are up $161 billion, or 5.8 percent, in the first eight months of fiscal year 2019 compared to 2018 (the increase in spending is $257 billion before adjustments for timing shifts). Spending on the military is up 9.8 percent during that period, due in large part to appropriations spending increases agreed to in the 2018 bipartisan budget deal.
As deficits widen, and debt piles up, the government’s net interest payments also increase, even though interest rates remain very low. To this point in fiscal year 2019, the government has spent $276 billion servicing outstanding federal debt, which is $37 billion, or 15.6 percent, more than was spent during the same period of fiscal year 2018.
With revenue flat and outlays rising rapidly, the government’s budget deficit is growing. Through May, the deficit was $739 billion, or $206 billion more than the level recorded during the same eight-month period of fiscal year 2018. After adjusting for shifts in the timing of certain outlays, the deficit increase since last year is $112 billion.
These budget results, covering two-thirds of fiscal year 2019, are not consistent with a story of a tax cut that is paying for itself.
In recent months, some economists have begun to suggest that the government need not worry excessively about growing budget deficits because low interest rates make more public borrowing possible. In particular, they argue that when interest rates are below the rate of economic growth, as they are today in the U.S. and throughout the developed world, it is possible to reduce the level of debt to GDP even with small “primary deficits.” A primary deficit is the gap between revenue and spending excluding net interest payments on accumulated debt.
While it is true that debt can fall relative to the overall size of an economy if primary deficits are small and interest rates are low, those conditions do not apply in the case of the U.S. Interest rates are low, but the government’s primary deficits are not small. The Congressional Budget Office (CBO) projects that the federal government will run average annual primary budget deficits over the coming decade of 1.7 percent of GDP. So even though even interest rates on ten-year Treasury notes will stay below 4 percent throughout CBO’s ten-year forecast, the government’s debt burden still rises from 78 percent of GDP in 2018 to 92 percent of GDP in 2029.
CBO estimates that the government would need to reduce its primary deficit to about 0.5 percent of GDP annually for the debt burden to fall rather than rise over the coming decade. Cutting primary deficits from an average of 1.7 percent of GDP annually to 0.5 percent implies enactment of deficit reduction over ten years totaling $3.1 trillion. It is an understatement to suggest deficit reduction of that magnitude is not likely in the current political environment. Indeed, it is far more likely that Congress will pass, and the president will sign, another bipartisan appropriations deal that will add trillions of dollars to projected spending and debt over the coming decade.
Political leaders are not eager to confront the nation’s fiscal problems because the solutions are not popular with voters. So instead of acting, they continue to say that the budget outlook will somehow improve spontaneously, or that it is not really a problem. The results through May show that the budgetary miracle that some politicians claim is coming remains nowhere in sight, and that federal debt remains on a trajectory that will pose serious risks for the economy.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.
