America’s deficit is growing sharply and will surpass $1 trillion per year by 2020, the Congressional Budget Office reported Monday.The federal deficit will hit $804 billion in fiscal year 2018, a 21 percent increase from 2017’s deficit of $665 billion, CBO said.President Trump and congressional Republicans in December passed a new tax law projected to cut government revenue by more than $1 trillion over the next 10 years. In March, members of both parties approved a funding measure to increase military and domestic spending by nearly $300 billion over the next two years.
Like clockwork, Republicans are trying to make further cuts through the rarely-used “rescission” process. Soon will come the plans to cut Medicare and Medicaid. The debt problem, however, is largely a function of a tax plan based on exaggerated claims of economic growth and blatant dissembling on revenue loss. “Based on CBO’s numbers, those who claimed the tax cut would pay for itself should be hiding under a rock about now,” says Jared Bernstein, former chief economist for vice president Joe Biden. “The tax plan seriously whacks revenues, especially over the next few years, which is exactly what we don’t need given CBO’s points about the cost of maintaining Social Security and Medicare as our population ages.”
Republicans can blame spending (i.e., their own bill) all they like, but it is clear the tax cut is the culprit here. The CBO reports:
The largest effects on GDP over the decade stem from the tax act. In CBO’s projections, it boosts the level of real GDP by an average of 0.7 percent and nonfarm payroll employment by an average of 1.1 million jobs over the 2018–2028 period. During those years, the act also raises the level of real gross national product (GNP) by an annual average of about $470 per person in 2018 dollars. (GNP differs from GDP by including the income that U.S. residents earn from abroad and excluding the income that nonresidents earn from domestic sources; it is therefore a better measure of the income available to U.S. residents.) Those projected effects grow in the earlier years of the period and become smaller in the later years.
The conservative Committee for a Responsible Federal Budget tweets, “We now are facing trillion dollar deficits as far as the eye can see — a terrible path, made even worse by the fact that this comes amidst a strong economy and is the self-inflicted result of irresponsible policy choices.” CRFB enumerates a list of disturbing facts: “The 2019 deficit is $981 billion, almost 50% larger than last year’s deficit of $665 billion. Debt will exceed the size of the economy by 2029. Previously, CBO found debt would be about 93% by 2028. Interest spending will nearly quadruple: From $263 billion in 2017, to $915 billion in 2028.”
The consequences of a massive increase in debt are three-fold.
First, it will begin to sap economic growth. Republicans promised sustained growth of 3 percent. However, as debt rises, interests rates increase and investment slows, debt will become a drag on the economy. CBO reports:
In CBO’s projections, the growth of real GDP exceeds the growth of real potential output over the next two years, putting upward pressure on inflation and interest rates (see figure below). But during the 2020–2026 period, a number of factors dampen economic growth: higher interest rates and prices, slower growth in federal outlays, and the expiration of reductions in personal income tax rates. After 2026, economic growth is projected to rise slightly, matching the growth rate of potential output by 2028. . . .In CBO’s projections, real GDP expands by 3.3 percent this year and by 2.4 percent in 2019. It grew by 2.6 percent last year. Most of the growth in output in the next two years is driven by consumer spending and business investment, but federal spending also contributes a significant amount this year. After averaging 1.7 percent from 2020 through 2026, real GDP growth is projected to average 1.8 percent in the last two years of the 2018–2028 period.
Second, should the economy slow even further, say in response to a trade war, the country will have fewer resources to spare for stimulus spending. Having sapped revenue in good times, we will be left with the prospect in a downturn of either dangerously accelerating debt again or suffering the ills of a longer-than necessary recession.
Third, we still have not spent sufficiently on items we badly need — infrastructure, worker training, etc. In the frenzy to put resources into the pockets of corporations and the richest Americans, we are undercutting our ability to prepare for long-term growth, transition to an information economy and increase productivity.
It is not surprising that Senate Minority Leader Charles E. Schumer (D-N.Y.) is having a “told you so” moment. In a written statement he declares, “The CBO’s latest report exposes the scam behind the rosy rhetoric from Republicans that their tax bill would pay for itself. From day one, the Republican agenda has always been to balloon the deficit in order to dole out massive tax breaks to the largest corporations and wealthiest Americans, and then use the deficit as an excuse to cut Social Security and Medicare.” You can be sure this will be an issue for voters in the midterms. More important, it will be an issue for policy-makers for years to come.