Fiscal Hole Will Test President Donald Trump’s Agenda
Posted by hkarner - 7. Februar 2017
Source: The Wall Street Journal
President’s appetite for stimulus comes up against budget realities and some fellow Republicans
President Trump’s stated goal for more spending on infrastructure appears out of step with GOP elected officials.
For an economy that isn’t in recession, the U.S. is facing one of the bleakest fiscal outlooks since World War II. One question that President Donald Trump will soon have to decide: How much is he willing to embrace even wider deficits?
The answer will determine whether Mr. Trump’s domestic agenda lives up to markets’ bold expectations, and his own.
Before Mr. Trump does anything, growing budget deficits are already on a course to push federal debt to record levels as a share of gross domestic product. That will make it extremely difficult to make good on promises to cut taxes and boost spending without spilling more red ink.
Unlike past periods, deficits are swelling not because of an economic downturn or a short-term boost in discretionary spending, but because of the costs of caring for an aging population. Medicare and Social Security are the biggest projected drivers of spending. Ten years ago, some 6,700 Americans turned 65 every day. The number is now 9,800 Americans, and it will rise to 11,700 by 2026.An aging population not only pushes up federal spending on health care and retirement, it also shrinks the tax base and may lead to slower rates of growth in personal income and household spending.
Faster economic growth would solve many of Mr. Trump’s problems. But doubling the growth rate to 4%, Mr. Trump’s stated goal, would be difficult when productivity and the labor force are growing slowly. Another hurdle: Unemployment is already low. The Federal Reserve might stand in the way of a very fast growth rate if it threatens to push unemployment much lower and risks spurring inflation.
The Fed sees a long-run growth rate of just 1.8%.
“You’re not going to be able to grow your way out of this one. It’s too big,” says Rep. Tom Cole (R., Okla.). He expresses worry about relying on rosy growth projections, through the use of so-called dynamic scoring, to assume tax cuts would stimulate the economy to materially offset upfront revenue losses. “I worry we’re so in love with dynamic scoring, and it never works out the way the tax gurus tell us it’s going to,” says Mr. Cole.
Two trends kept deficits below forecasts in recent years. First, low inflation and weak global growth held down interest rates and thus federal borrowing costs. Second, health-care inflation has been slower than expected. It isn’t clear how long those will last.
The Congressional Budget Office expects, under current law and assuming the economy keeps expanding modestly, deficits to rise from 2.4% in the fiscal year that starts this October to 4.2% gradually over the following four years.
The last two times Republicans reclaimed the White House from Democrats, in 1981 and 2001, they secured large tax cuts. President Ronald Reagan inherited shrinking deficits, and George W. Bush inherited budget surpluses that were projected to grow. The publicly held debt was much lower, too, at 25% and 31% of GDP, respectively, compared with 77% today.
Faced with a worsening deficit outlook when he took office in 1993, President Bill Clinton tossed overboard his campaign promise of a middle-class tax cut. Mr. Trump and his team have yet to detail the scope of his agenda and the deficits it may require.
One overriding question: Would he design tax changes that don’t raise deficits, a goal of House Republicans, or would he stick with plans sketched out during his campaign that relied heavily on growth to offset steep revenue losses?
Mr. Trump has tipped his hand in favor of tolerating deficits. “A balanced budget is fine, but sometimes you have to fuel the well in order to really get the economy going,” Mr. Trump said on Fox News last month. “Our military is more important to me than a balanced budget.”
He could face resistance from budget hawks in his own party. GOP lawmakers have split sharply over the past two years on whether to boost military spending without adding to the deficit.
Lawmakers are even warier about adding to deficits with infrastructure spending, an initiative where Mr. Trump’s appetite seems most out of step with GOP elected officials. White House officials are looking at creative ways to finance such spending.
“There’s a big budget battle coming if they don’t come forward with a big pay-for plan,” says William Beach, an economist with the right-leaning Mercatus Center at George Mason University.
Even if Republicans opt to offset new spending with cuts, it remains unclear whether the White House could identify programs that allies in Congress are willing to axe. Mr. Trump has ruled out changes to the biggest drivers of rising outlays, Social Security and Medicare.
Republicans are planning cuts on nondiscretionary spending and welfare programs, but some of those have already seen large reductions due to automatic curbs Congress imposed five years ago.
Big cuts can be popular in symbolic budget resolutions offered in the spring. But analysts at Beacon Policy Advisors said in a report that when it comes to actually passing spending bills in late summer, Republican lawmakers will object to specific reductions that affect their own constituents.
“The long-term budget problems are no longer long-term. They are here now,” says Andrew Laperriere, policy analyst at research firm Cornerstone Macro LP. In overlooking the budget math, he believes, investors are too optimistic about both the timing and size of any fiscal stimulus.