President's budget proposal lands with a thud

In a recent letter, SAFE urged the president to take a serious stab at the fiscal problem, starting with his upcoming budget proposal and continuing during his reelection campaign.

The fiscal problem could represent a solid issue for you in the 2020 elections, both because it is intrinsically important (as many Americans realize) and because a vigorous debate about this issue could help to differentiate your position from that of the other candidates..

We would suggest that you commit to balance the budget by 2025 – offer a specific plan for achieving the goal – and challenge other candidates to do likewise. We would also suggest that one of the three presidential debates be reserved for the fiscal problem.


We sent a
similar letter to selected members of Congress, including seven who have announced plans to seek the Democratic presidential nomination in 2020. And both of our letters cited entries in the SAFE blog for further discussion: Prospects for action on the fiscal problem, 2/18/19; It’s time to balance the budget, 2/25/19.

The president’s budget proposal for Fiscal Year 2020 (BP-2020) was published a week ago, and we eagerly reviewed it to see if SAFE’s line of thinking had been reflected. Regrettably, there is no promise to balance the budget by 2025, only talk about budget balance by 2034 (if everything goes swimmingly in the meantime).

To be fair, however, few of our political leaders are supporting fiscal responsibility these days – a buoyant economy notwithstanding – and there was probably just so far the president could go in bucking the tide. “[The] political dynamics that enabled bipartisan deficit-cutting deals decades ago has disappeared, replaced by bitter partisanship and chronic dysfunction.” As budget deficit balloons, few in Washington seem to care, Andrew Taylor, apnews.com,
3/10/19.

The kind of budget we were hoping for was probably unrealistic, and even the president’s less ambitious proposal will be a “tough sell.” An overview of BP-2020 follows, including both pluses and minuses. Next week’s entry will focus on congressional reactions and the path forward.

I. Budget documents – The Office of Management and Budget (OMB) will post the budget proposal and related documents on line. President’s budget for FY 2020, omb.com, 3/11/19 (download PDFs). Some of the budget documents have not been posted yet, notably the Major Savings and Reforms (MSR) volume, but they should be available soon.

II. Outlays – To begin on a positive note, BP-2020 prioritizes discretionary government programs rather than assuming they should all grow (or be cut) at about the same rate. As a result, defense spending would be kept over the recently increased funding level in nominal dollars (but decline on an inflation-adjusted basis at the assumed rate of 2.3% per year), whereas nondefense spending would be cut 27% in nominal dollars (over 40% on an inflation-adjusted basis).

The fastest growing budget outlays, mandatory spending programs (Social Security, Medicare, etc.) and interest expense, would be modestly trimmed (but continue rising, even on an inflation-adjusted basis).

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Some critics have noted that far bigger adjustments to mandatory programs will be needed if the budget is ever going to be balanced. Perhaps it’s OK not to lay all the cards on the table right now, however, because initial successes will be needed to establish momentum for any meaningful restructuring of the mandatory spending programs.

We envision a multistage process: (1) start cutting discretionary spending where feasible now to establish a change in direction; (2) encourage presidential candidates in 2020 (see SAFE’s recent letters) to explain how they would propose to balance the budget if elected; and (3) look to the winner to execute his or her plan (including the appointment of special commissions to recommend changes to the mandatory programs and action on the resulting recommendations) by 2025.

On the other hand, the president’s budget proposal could be faulted for lack of political realism in that the members of Congress won’t be disposed to support the targeted spending cuts that are envisioned. Far from aspiring to cut spending, many of them are intent on raising the current budget caps on FY 2020 & FY 2021 discretionary spending so spending increases can be voted. (The administration has already proposed to increase the permissible level of defense funding by fattening the overseas contingency fund to the tune of $165 billion in 2020 and $156 billion in 2021. Table S-7).

Proposed reductions in mandatory spending (see below) are modest in percentage terms, but substantially outweigh proposed cuts to discretionary spending on a dollar basis.

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The president will predictably be attacked for breaking his promise not to cut Medicare, but the adjustments involved won’t adversely affect plan participants. See this comment of a left-leaning observer. Donald Trump’s budget for a declining America, Ben Ritz, forbes.com,
3/14/19.

On its surface, the Trump budget appears to include $845 billion of cuts to Medicare spending. But this figure is misleading: roughly $270 billion of these cuts are not cuts at all - rather, the Trump administration proposes to take programs that have little to do with Medicare and [move] them off Medicare’s books into the Department of Health and Human Service’s general budget.

Moreover, several of the real cuts to Medicare are much-needed reforms to payment structures similar to earlier proposals from the Obama administration. Taken together, Trump’s proposed reforms are actually more likely to reduce out-of-pocket costs for Medicare beneficiaries rather than increase them.


III. Receipts – Another positive (for conservatives at least) is that there has been no proposal to reduce deficits by raising taxes, the approach favored by political leaders who can’t bring themselves to support spending discipline. Baseline (Table S-3) and budget (Table S-4) receipts over the 10-year budget projection period are virtually identical, i.e., $48.9 trillion (baseline) vs. $49.0 trillion (budget).

Moreover, the administration’s presentation masks a tax cut that is contemplated (but won’t happen without congressional action). Recall that the individual tax cuts enacted in December 2017 were temporary, and are scheduled to expire after 2025 unless extended before then. One would therefore have expected a dip in projected individual income tax receipts after 2025 on Table S-3, but no such dip is shown. Why?

Reasoning that Congress will make the individual tax cuts permanent in due course, the OMB built them into the baseline. This eliminated a tax receipts difference after 2026 (some $600 billion over the remainder of the budget projection period) between Tables S-3 and S-4, thereby avoiding line entries in Tables S-2 (Effect of budget proposals on projected deficits) and S-6 (Mandatory and receipt proposals). Donald Trump’s budget for a declining America,
op. cit.

Although we believe the individual tax cuts should be made “permanent” (they could still be changed at any time, like any other provision of the tax code), it would have been better to disclose the existing situation and explicitly note the administration’s intentions for fixing it.

Another interesting point: individual income tax collections are projected to grow faster than one might expect. See Table S-5 (Proposed budget by category as a percentage of GDP). The sum of corporate income taxes, payroll taxes, excise taxes, etc. basically rises in tandem with GDP (from 8.1% of GDP in 2019 to 8.4% in 2029), but individual income taxes grow from 8.0% of GDP in 2019 to 9.7% in 2029. Perhaps it’s anticipated that American workers will work their way up into higher income tax brackets.

Finally, the administration has arguably presented an unduly rosy budget scenario by assuming faster economic growth than can reasonably be expected – according to other experts such as the CBO - thereby lowballing spending needs and overestimating tax receipts. Donald Trump’s budget for a declining America,
op. cit.

. . . perhaps the most outlandish aspect of the Trump budget is the audacious economic growth rates it assumes. The White House projects GDP to be more than 13% higher at the end of the next decade than does the non-partisan Congressional Budget Office in its baseline scenario. By comparison, President Obama’s final budget projected an end-of-the-decade GDP that was only 3% higher than CBO’s baseline estimate.

Here we would be inclined to disagree. The OMB did not juice its growth forecast this year, but continues to use essentially the same economic assumptions that were used for BP-2018 and BP-2019. Furthermore, a 3% growth rate for GDP doesn’t seem obviously unattainable, let alone “outlandish.” Admittedly a shortfall could develop however, if there was a trade war with China, global recession, or other adverse developments. The Trump budget’s economic forecasts should work, for now, Bruce Yandle, Washington Examiner,
3/13/19.

. . . to experience this happy outcome for a decade, we need a bit of cooperation from Washington politicians. Here’s a handy checklist: Elimination of all currently imposed tariffs and declare peace on the trade-war front; no more government shutdowns; no more tax increases; and no more de novo regulatory initiatives. Is this too much to hope for? Unfortunately, I believe it is. But I sure like thinking about it.

IV. Deficits – By definition, a shortfall between receipts and outlays constitutes a budget deficit. BP-2020 shows this state of affairs continuing for the next 10 years, although the shortfall would gradually be reduced.

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Two years ago, the president’s first budget proposal took credit for eliminating the deficit by year 10 (then FY 2027) of the budget projection. Pluses and minuses: Assessing the president’s budget proposal,
6/5/17.

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.

This year, the fiscal responsibility theme is expressed in terms of spending reductions (“over $2.7 trillion in spending reductions—more proposed spending reductions than any previous administration in history”), with no predictions about balancing the budget. And the president’s statement at the outset of BP-2020 seems to put the onus on Congress for “bring[ing] federal spending and debt under control.”

We are now addressing our challenges from a position of strength. My 2020 Budget builds on the tremendous progress we have made and provides a clear roadmap for the Congress to bring Federal spending and debt under control. We must protect future generations from Washington’s habitual deficit spending.

What about predictions of budget balance by 2034? This statement has been made by Acting OMB Director Russell Vought, although it didn’t make the BP-2020 text. At a press briefing, Director Vought referenced “our unsustainable national debt,” which “nearly doubled under the previous administration,” and stated that trillion dollar deficits “[endanger] the future prosperity of our nation for generations to come.” Press briefing by Press Secretary Sarah Sanders and OMB Acting Director Russell Vought, whitehouse.gov,
3/11/19.

[Accordingly,] this budget contains nearly $2.7 trillion in savings, more spending reductions proposed than any administration in history. This budget will balance in 15 years.

Based on the way things work in Washington, saying something will get done in 15 years is equivalent to saying it will never happen. So does it really matter whether the budget is balanced or not? Some people say no, as for example Representative Alexandria Ocasio-Cortez who cites “modern economic theory” for the proposition that deficits must not be allowed to stand as an obstacle to implementing the Green New Deal and other high priority projects.

This sounds a lot like rationalizing fiscal irresponsibility to achieve one’s political ends, which isn’t modern at all; in fact it has happened throughout human history with often painful consequences. This time is different; Eight centuries of financial folly, Carmen M. Reinhart & Kenneth S. Rogoff, Princeton University Press,
2009.

Interestingly, the modern economic theory cited by AOC - countries that borrow in their own currency need not worry about government deficits as they can always create money to finance their debt - appears to have essentially zero support among reputable economists. Top economists are polled on economic policy espoused by AOC – here’s how many say it doesn’t work, Carlos Garcia, theblaze.com,
3/13/19.

But before joining in the chorus that the president’s budget proposal was “dead on arrival,” it may be well to consider whether the members of Congress are likely to come up with something better. Tune in next week for further discussion.


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