The US is facing a return to years of trillion-dollar annual budget deficits from 2020 onwards as the tax cuts pushed by President Donald Trump and Republicans and higher public spending strain America’s finances – at a time when the nine year economic recovery is starting to show signs of ageing.
In fact America could be staring at a decade where the size of its debt and budget deficit starts growing faster than the economy, and if the economy slows, then the situation will worsen dramatically.
According to top US budget watchdog the Congressional Budget Office, America’s budget deficit would be $US804 billion for the current financial year, which ends on September 30. That’s more than the $US665 billion shortfall at the end of fiscal 2017 and $US242 billion more than the CBO projected last (northern) summer.
Why? Well, the CBO said in its report (https://www.cbo.gov/publication/53651), “Accounting for most of that difference is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.” No mention of the ‘voodoo economics’ idea of dodgy economists that lower taxes generates higher spending and lower deficits.
Donald Trump’s new economic adviser, Larry Kudlow is a fervent believer in this rubbish. Some economists and business leaders here in Australia, including the Business Council and Federal Treasury believe in something similar will occur as a result of the proposed $65 billion of corporate tax cuts boosting wages in 10 year’s time.
The US hasn’t run deficits exceeding a trillion dollars since 2012. But there was a reason for that – from 2009 to 2012, deficits were above $US1 trillion as the government grappled with recession, the fallout of the GFC and a stuttering recovery.
The Republicans were strident critics of that spending and President Obama personally, but have remained silent as Trump and themselves agreed to even greater unfunded spending.
The report released on Monday was the CBO’s first comprehensive fiscal and economic outlook since the tax and spending legislation enacted by the US Congress late last year.
That review looked at the impact of the Trump legislation which slashed cutting taxes by $US1.5 trillion over 10 years, followed by a bill passed in March that lifts ceilings on discretionary spending over two years. The CBO’s outlook shows the fiscal stimulus will sharply lift growth this year, before the expansion loses momentum as the Federal Reserve lifts interest rates.
Given the rising deficits, the CBO now predicts that government debt held by the public will swell to nearly 100% of US gross domestic product at the end of the 2020s (9 in 2028). That would be the highest levels since 1946 and more than twice the average over the past five decades.
“Such high and rising debt would have serious negative consequences for the budget and the nation,” the CBO said in its Budget and Economic Outlook, warning that it increased the likelihood of a “fiscal crisis” in the US. If the US recovery becomes a slow down, then debt and deficit will rise even faster. And not a word from the debt and deficit mob and those conservatives who reckon higher spending will be inflationary.
But it could be worse because the CBO says its figures very likely underestimate the size of the deficit. CBO is required to calculate the effects of the laws as written. That means the CBO has to assume the unlikely event of deep cuts to discretionary spending. This includes defence, infrastructure, medical research, crop supports and subsidies and many other areas of outlays.
Neither party actually wants to implement deep cuts to these programs (despite all the hot air from republicans and groups such as the Tea Party and Donald Trump). That is why the Republicans and Democrats agreed in March to ignore mandated spending cuts (in a previous agreement) and maintain those programs.
More worrying for politicians the CBO projections and CBO also assumes significant tax increases toward the end of the 2020’s because the Trump tax cuts were designed to give permanent cuts to corporations and heirs of large estates, but linked these to temporary, expiring tax cuts for the middle class.Trump and the Republicans were forced to do this because the $US1.5 trillion budget limit did not allow them enough money to cut all the taxes they wanted to cut.
Trump and the Republicans cynically claim that the rich will lift their spending as a result of their higher tax free income and this will trickle down to the middle and working classes.
The CBO notes in its report that, if the tax cuts for lower income people are renewed by Democrats in the mid 2020’s then the fiscal outlook will be much darker. For example, the deficit would average 6.3% of GDP from 2023 to 2028, and rise to 7.1% of GDP by 2028.
