The path of national fiscal folly
PRESIDENT TRUMP’s new budget serves at least one purpose beyond that of doorstop: Viewed through a realistic lens, it helps highlight the worsening fiscal dilemma this nation now faces.
If you assume that those parts of the new tax cut package that ostensibly expire in December 2025 are extended, as are other tax cuts, and that the recent spending agreement establishes a new budgetary baseline, those policies will add $4.5 trillion more to the national debt over a decade, according to the Committee for a Responsible Federal Budget.
Add that to the debt we were already racking up before those policies, and the total effect would swell the national debt to $30 trillion, or an estimated 109 percent of Gross Domestic Product by the end of the next decade. That would surpass the previous highest debt-to-GDP ratio, which came in the aftermath of World War II.
The Trump administration disguises those effects through a series of gimmicks and legerdemain. For example, they are assuming that the economy will grow at about 3 percent annually for the next decade, and that the president will achieve a reduction in domestic spending of more than 40 percent over the same period.
How realistic is that? Most forecasters, including the Congressional Budget Office, consider 2 percent a far more likely average rate of growth. (At that lower growth rate, the national debt grows an additional $3.1 trillion over 10 years.) As for the budget cuts, the president is assuming that Congress will have the stomach for those large spending reductions, when in fact it has just passed — and he has just signed off on — a significant increase in both domestic and military spending.
Trump, who once spoke of balancing the budget over two terms, has now abandoned that talk; similarly, this budget discards his promise not to cut Medicare or Medicaid.
All this should surprise no one. Despite the usual supply-side palaver that the $1.5 trillion tax cut would pay for itself, no credible estimate, whether static or dynamic, has projected anything close. Almost all put the 10-year revenue loss at above $1 trillion. Meanwhile, last week’s budget deal, if it becomes the new baseline, would add $1.7 trillion, over a decade, to expenditures.
The fiscal framework has things for both sides of the aisle: more military spending favored by conservatives, more domestic spending favored by Democrats, including longer-term funding for the Children’s Health Insurance Program, or CHIP.
But it is hugely violative of this basic fiscal axiom: Unless budget expenditures are for long-term investments that will pay societal dividends over succeeding generations, in good economic times, those expenditures should be paid for as they are made.
No one knows exactly where the tipping point into economic and fiscal turbulence is when it comes to a national debt overload. But there is widespread agreement on several principles. First, over the longer term, the national debt shouldn’t increase at a faster rate than the economy. Further, the higher a country’s debt-to-GDP ratio, the more limited its range of response when the next economic downturn comes. The need to service a large debt also makes the budget shakier when interest rates increase. And finally, by increasing the debt load on future generations for today’s spending, we are limiting their lifestyle to expand our own.
The country’s current fiscal policy has become farcical. The tax cut obviously needs to be revisited. And some sort of spending restrictions need to be reimposed to start to narrow the currently widening gap between spending and revenue.
Yes, there will be some pain involved, but a nation neglects its current finances only at its very real future peril.