Pluses and minuses: assessing the president's budget proposal

Reader feedback at end.

There was a little girl, who had a little curl,
Right in the middle of her forehead.
When she was good, she was very good indeed,
But when she was bad she was horrid.
- Henry Wadsworth Longfellow


Why did the president’s budget proposal for the coming fiscal year bring this poem to mind? Like the little girl, BP 2018 is a puzzling mix of admirable features and glaring deficiencies.

Most serious observers (whether conservative or liberal) begin by noting aspects of the BP they favor and end with two major caveats: (1) Whatever budget Congress devises will look quite different; and (2) Even if BP 2018 was adopted verbatim, it wouldn’t deliver the promised result (a balanced budget within ten years).

The following Office of Management and Budget documents (downloadable as PDFs) will be referenced in the discussion: BP 2018 (“A New Foundation for American Greatness”),
5/23/17; MSR (“Major Savings and Reforms”), 5/23/17; and BP 2010 (“A new era of responsibility: Renewing America’s promise”), 2/26/09.

A. Overall thrust - Submitted to Congress in late May, BP 2018 relates how the president came to inherit $20 trillion in debt and a “broken, stagnant economy,” proposes measures to improve the situation, and presents the customary budget tables

The tables recap fiscal results for the most recently completed (2016), current (2017), and budget (2018) fiscal years. They also project results for the following nine years (2019-2027) on both a baseline and a budget basis. In the baseline projection (Table S-3), the estimated FY 2017 deficit of $605 billion rises to $842 billion by FY 2027. In the budget basis projection (Table S-4), the FY 2017 deficit is whittled down and eliminated.
Screen Shot 2017-05-30 at 12.13.39 PM

Omitting data for intervening years, here are the indicated effects of policy changes (Tables S-2 and S-6) in FY 2027. The budget would supposedly be balanced by that year without raising taxes or significantly cutting middle class entitlements.

Screen Shot 2017-05-30 at 1.03.16 PM
*Baseline deficit for FY2027 ($1,338) less the “effect of economic feedback.” Table S-2.

One might question why fiscal data should be projected for ten years when only one year is being budgeted. Is a ten-year time horizon needed to demonstrate how current policy changes would play out, or are all these data more distracting than informative?

A 5-year projection period was formerly used – which in our opinion was more than long enough – but an incoming administration changed this in 2009. BP 2010, page 9. (This and other page numbers have been adjusted so that cited materials can be accessed using the “go to page” function.)

. . . this Budget does begin the hard work of bringing new levels of honesty and fairness to your Government. It looks ahead a full 10 years, making good-faith estimates about what costs we would incur; and it accounts for items that under the old rules could have been left out, making it appear that we had billions more to spend than we really do.

BP 2010 projected gross federal debt of $21.0 trillion by the end of FY 2017 (9/30/17) – which is eerily close to the current estimate of $20.4 trillion. Unlike many observers at the time, SAFE took this dismal outlook seriously. The young and the reckless,
3/2/09.

In a nutshell, the young and the reckless have taken the wheel.  They are driving very fast and veering all over the road. Before you know it, this country will wind up in a ditch.  We feel it is time for some adult supervision.  If such is not provided, America, don’t say we did not warn you.

B. Pluses – According to the current budget proposal, the government will end its deficit spending and eventually repay some debt. BP 2018, p. 7.

Through streamlined Government, we will drive an economic boom that raises incomes and expands job opportunities for all Americans. Faster economic growth, coupled with fiscal restraint, will enable us to fully fund our national priorities, balance our budget, and start to pay down our national debt.

Although there is no reason balancing the budget should take a decade, it’s refreshing that the idea of balancing the budget is being brought up again after years of talk about sustainable deficits, etc.

We were also encouraged to read that the “first step” in balancing the budget is reducing federal spending. (All too often, DC insiders have viewed this course as the last resort.) BP 2018, p. 15.

Deficit spending has become an ingrained part of the culture in the Nation’s capital. It must end to avoid passing unsustainable levels of debt on to our children and grandchildren and causing serious economic damage.

BP 2018 expresses an intention to recognize the interests of “hardworking taxpayers” or the equivalent. And Budget Director Mick Mulvaney has added that government programs should be evaluated based on the results achieved, not the amount of money doled out. Trump’s “taxpayer-first” budget focuses [on] spending, proposes $3.6 trillion in cuts, S.A. Miller, Washington Times,
5/22/17.

We cannot continue to simply measure our compassion or our success by the amount of money we spend. We are going to measure our compassion and success by actually helping people and by respecting taxpayers who pay for it in the first place.

Thus, numerous spending cuts are proposed, affecting both nondefense discretionary spending (defense spending would be increased over the next several years) and mandatory welfare programs (Social Security disability, SNAP, Medicaid, etc.).

For cogent descriptions of the spending cut proposals, see MSR. Here are three of the biggest ones, each of which seems generally consistent with prior SAFE analyses.

•Social Security disability: MSR 121; compare SAFE blog
6/1/15

•SNAP (formerly food stamps): MSR 136; compare SAFE blog
4/29/13

•Medicaid: MSR 146; compare SAFE blog
4/6/09 (point 4)

Some 60 discretionary spending proposals call for the elimination of specified programs or agencies, with indicated one-year savings of $26 billion. For example, here’s the “justification” offered for doing away with the Legal Services Corporation. MSR 109.

This proposed elimination will encourage nonprofit organizations, businesses, law firms, and religious institutions to develop new models for providing legal aid, such as pro bono work, law school clinics, and innovative technologies. The proposal also puts more control in the hands of State and local governments which better understand the needs of their communities. Further, the LSC is not subject to the same accountability measures as other agencies, such as the Antideficiency Act and certain public reporting requirements. The LSC's indefinite appropriation authorization expired in 1980.

Although defense spending would be boosted overall, the budget proposal references Pentagon estimates of about 20% “excess infrastructure capacity” and proposes another round of the Base Realignment and Closure (BRAC) process in 2021. MSR 31.

Other noteworthy proposals include eliminating agricultural subsidies for farmers with Adjusted Gross Incomes of over $500K (MSR 132); selling half of the strategic petroleum reserve (MSR 144); authorizing the USPS to stop Saturday mail deliveries (MSR 168); and restructuring the Consumer Financial Protection Bureau (MSR 169).

It’s our sense that these proposals have been well researched and merit thoughtful consideration. Quite a contrast to the airy promises (typically not kept) of the previous administration that government spending would be rigorously scrutinized as time permitted.
BP 2010, p. 9.

We need to put tired ideologies aside, and ask not whether our Government is too big or too small, or whether it is the problem or the solution, but whether it is working for the American people. Where it does not, we will stop spending taxpayer dollars [aside from defense cuts, we don’t recall many decisions of this nature over the ensuing 8 years]; where it has proven to be effective, we will invest. This is the approach, for example, we have begun in allocating funds to education, health care, and national security. And as we continue the budgetary process, we will identify more cuts and reallocations for the full Budget presented this spring, and undertake efforts to reform how the programs you fund are managed so that overruns are avoided, waste is cut, and you get the most effective and efficient Government possible.

C. Minuses – As a framework for this discussion, let’s consider some observations (courier font, underlined) of the Concord Coalition. Trump budget lacks credible debt-reduction path, concordcoalition.org, 5/23/17.

(Concord’s Robert Bixby was one of the principals in a campaign to promote awareness of the fiscal problem during the run-up to the 2008 elections. The general thrust: massive adjustments were needed, which might best be brokered by an independent commission. Two cheers for the fiscal wake-up tour,
11/5/07.)

1. The driving force of deficit reduction in this budget is the supposed super-charged economic growth effect of an unspecified tax cut. That alone calls the credibility of the budget into question.

An economic growth rate of 3% per year is assumed in the BP 2018 projection versus the current consensus view of 2%. This seemingly modest difference gives rise to the previously noted “effect of economic feedback” adjustment, which is assumed to reduce the baseline deficit (presumably due to higher tax revenues) by $0.5 trillion in FY 2027.

Here are the key numbers from BP 2018 plus baseline data from a Congressional Budget Office analysis (which assumed a 2% growth rate). The budget and economic outlook: 2017 to 2027,
1/24/17.
Screen Shot 2017-06-02 at 11.09.18 AM
*The initial revenues figure shown was calculated by subtracting the “effect of economic feedback” adjustment from adjusted baseline revenues.
**The $120 reduction from baseline budget revenues reflects the assumed repeal and replacement of GovCare.

Some critics claim the fiscal benefit of proposed tax cuts has been overstated by failing to reflect the initial revenue losses. The dumb accounting error at the heart of Trump’s budget, Matthew Yglesias, cnbc.com,
5/23/17.

Trump is not only counting on supply-side magic growth to make his numbers work, he's using the same magic bean twice. First the tax cuts provide enough extra growth to make the tax reform deficit-neutral. Then the deficit-neutral tax reform provides enough extra growth to make the overall budget balanced. It's ridiculous.  Larry Summers, the former Treasury secretary and National Economic Council director, calls it "a logical error of the kind that would justify failing a student in an introductory economics course."

The OMB response is that tax reform will be “deficit neutral,” so no reduction in projected tax revenues should be expected. Trump tax plan won’t cut revenue, Joseph Lawler, Washington Examiner,
5/25/17.

Mulvaney's statement . . . is that the Trump tax plan would lose zero in revenue. In effect, it wouldn't be a tax cut at all. For every dollar lost through tax rate reductions, another dollar would have to be raised through eliminating deductions, credits and other breaks.

However, the OMB may not be on the same page as the president and his tax writers. [Treasury Secretary Steven] Mnuchin: Trump wants tax reform, not just tax cuts, Joseph Lawler, Washington Examiner,
6/1/17.

Last week, the administration stirred up some confusion about its intentions for its tax reform's effects on revenues. During testimony on Capitol Hill, Mulvaney said that the plan would pay for itself in a static analysis. On Wednesday, however, he told the Washington Examiner that that assumption was only meant for the budget document, and was not indicative of the administration's actual plans.

Our take: a higher economic growth rate assumption doesn’t seem unreasonable based on plans for tax cuts plus a major rollback of burdensome regulations. If the administration’s tax plan would only be revenue neutral on a dynamic scoring basis, however, then the immediate revenue effects of tax rate cuts should be reflected in projected revenues. Ergo, the double-counting charge may be partially valid.

2. The cuts to non-defense discretionary spending are simply unrealistic given recent history; the last three budget agreements have, on a bipartisan basis, increased spending on these programs relative to levels set in the Budget Control Act of 2011 (“sequester” caps). In this budget, such spending is cut by 42 percent in dollar terms in 2027 relative to the administration’s baseline.

Congressional opposition to the proposed spending cuts in FY 2018 has been evident on both sides of the aisle, suggesting that Democrats will be united in opposition and Republican support will be squishy. Trump’s budget to preserve the swamp? Veronique de Rugy, townhall.com,
5/25/17.

. . . GOPers have already made clear that they have zero appetite for pursuing the spending cuts and program terminations recommended in the administration's budget proposal. Surprised? You shouldn't be. Republicans have had many opportunities over the years to ax such budget zombies as the National Endowment for the Arts, Corporation for Public Broadcasting subsidies and the Economic Development Administration. They're not going to finally go to war for those spending cuts now.

Even if the immediately proposed cuts in discretionary spending held up, the proposed “two-penny plan” to “reduce non-defense budget authority by two percent each year” over the next decade strikes us as naive. BP 2018, p. 19.

And the idea of letting each agency set its own targets doesn’t seem much better. BP 2018, p. 20. Continuing spending cuts can’t be expected without top-down guidance.

3. Even defense spending shrinks to close to half the historical average as a percent of GDP by 2027 (4.4 percent of GDP average vs. 2.3 percent of GDP), contradicting the administration's own claims of the need to boost military spending.

A strong case can be made for beefing up the US military, as the administration has promised to do, and replacing 50-year-old weapons systems won’t come cheap. Postelection update: defense budget,
12/15/14.

Yet after some initial increases, the defense budget is projected to undershoot the current baseline starting in FY 2022. BP 2018, Tables S-3 & S-4.

One hopeful sign: Several cost-cutting initiatives are contemplated that haven’t been reflected in the MSR portfolio of spending cuts. Perhaps the savings could help defray the costs of beefing up the combat capabilities of our military forces. BP 2018, p. 23.

The budget lays the groundwork for an ambitious reform agenda that underscores the president’s commitment to reduce the costs of military programs wherever feasible without reducing effectiveness or efficiency. The Budget also continues ongoing efforts to improve [Department of Defense] business processes, reduce major headquarters activities by 25 percent, and eliminate redundant spending on service contracts.

4. . . . the budget assumes enactment of the House-passed version of healthcare reform (the American Health Care Act). However, in addition to the AHCA’s $840 billion in cuts to Medicaid, the budget proposes $610 billion in further cuts to Medicaid. Ultimately, Medicaid would face a nearly 50 percent cut in the year 2027 relative to current law. The magnitude and rapidity of this reduction are unrealistic given the current debate over the AHCA in the Senate.

The most recent CBO review of AHCA predicted that for the period 2017-2026, this legislation would reduce Medicaid spending by $839 billion and cut deficits by $150 billion on a net basis. Although it is assumed that GovCare will be overhauled, however, this wouldn’t necessarily be achieved by enacting the AHCA.

BP 2018 does not propose to cut Medicare outlays, although proposed policy changes would slow the growth of this program considerably.
Screen Shot 2017-06-02 at 1.42.28 PM

If the AHCA was enacted in addition to adopting BP 2018, Medicaid outlays would be further reduced. However, the combined adjustment for Medicaid would probably be less than the sum of the BP 2018 and AHCA adjustments. Fact check: Does the Trump budget gut Medicaid? David Sivak, dailycaller.com, 5/30/17.

The $834 billion reduction in the AHCA is separate from the $610 billion of savings in the White House budget. Mulvaney believes these savings will overlap with one another and that combined cuts to the growth of Medicaid will be more than $834 billion but less than $1.4 trillion.

If anything, the administration deserves credit for proposing changes to slow the unsustainable growth of this program – which has been poorly administered at best – and make the states more accountable for the results. Trump’s budget puts Medicaid on a path to long-needed reform, Robert Moffit, dailysignal.com,
5/25/17.

5. [The] president’s [budget] proposal leaves Medicare untouched and offers no substantive reforms to reduce healthcare costs. *** It also proposes $72 billion in cuts to Social Security Disability Insurance while forgoing any changes to Social Security’s Old Age and Survivors Insurance program, which is both much larger and serves a wealthier population.

Together, Social Security and Medicare accounted for 37.9% of total government outlays in FY 2017, which percentage is projected to be 50.6% in FY 2027. BP 2018, Table S-4.

Given the inherent difficulties in balancing the budget, such a big chunk of the overall equation cannot be viewed as sacrosanct. This wouldn’t make sense, either logically or politically. Trump’s budget proposal isn’t perfect, but it’s a start, Michael Tanner. cato.org,
5/24/17.

Perhaps the biggest problem with Trump’s budget is its continued failure to deal with the biggest drivers of our long-term debt: Social Security and Medicare. Without a willingness to reform these two programs, which together account for 38 percent of federal spending, it will be impossible to stem the future tide of red ink.

Some have complained that the administration is proposing “savage” or “devastating” program cuts for welfare benefits while deferring action on middle class entitlement programs, but one has to “start somewhere.” The real sin would be to continue ducking in hopes that the fiscal problem will magically solve itself.
Ibid.

Yes, this projection relies on unrealistic levels of economic growth and cuts that are never going to happen, but it still makes Donald Trump the only president even to aspire to balancing the budget since Bill Clinton in 2001.

Although it may make sense to defer action on Social Security and Medicare for now, however, both these programs will need to be tackled eventually. And in the meantime, we would suggest that the administration abandon its proposal for a new entitlement program. BP, p. 26.

During his campaign, the President pledged to provide paid family leave to help new parents. The Budget delivers on this promise with a fully paid-for proposal to provide six weeks of paid family leave to new mothers and fathers, including adoptive parents, so all families can afford to take time to recover from childbirth and bond with a new child without worrying about paying their bills.

The projected cost for parental leave seems relatively modest, and it could supposedly be offset by a “package of sensible reforms” to the Unemployment Income system. But the cost would predictably balloon over time, as has happened with many other entitlement programs.” The Ivanka entitlement: Democrats are already calling a $25 billion subsidy too stingy, Wall Street Journal,
5/25/17.

Once an entitlement is codified it expands. Proponents note that underwriting the benefit requires only a tiny increase in taxes, or some other levy on businesses. But wait until Democrats double or triple the duration of the leave, which they will do as soon as they are in power. The idea that Republicans can propose a cost-effective entitlement is delusional, though many on the right accept income redistribution as long as the money flows to GOP constituencies.

**********FEEDBACK**********

#Remember the Grace Commission in the 1980's?  Didn't they make recommendations about unneeded government agencies? – SAFE member (California)

Yes, although members of Congress weren’t receptive and most of the recommendations were ignored initially. Citizens Against Government Waste was founded in 1984 to carry the torch, and it’s been doing yeoman work in pointing out cost saving opportunities ever since. https://www.cagw.org/about-us/mission-history

#Only real growth can help here. The budget will NEVER be balanced as this just prompts the left to push for more taxes for more frivolous social programs. Real growth comes only from NEW jobs created by new or existing companies where the job production efficiency adds to the GDP and the employee taxes add to federal revenues.  – SAFE director

According to economist Kevin Hassett, 3% economic growth is achievable, but several changes would be needed to achieve it. How Trump’s economic adviser nominee says 3% growth can happen, Jacob Pramuk, cnbc.com, 6/6/17.

#I agree with another round of BRAC. Also, we should drive the sale of govt. surplus facilities. I think there’s a program underway, but I’ll bet it’s passive. – SAFE director

Sale of govt. surplus facilities may be a good idea, but it doesn’t seem to be mentioned in either the budget proposal or the MSR volume.

#Congress knows where cuts can be made.  They simply don't have the guts to follow through.  – SAFE member (Delaware)


© 2018 Secure America’s Future Economy • All rights reserved • www.S-A-F-E.org