Friday, December 14, 2018

Federal Deficit For November Hits Record High Despite Tax Reform

Tax reform stands as the one major legislative accomplishment of the Trump Administration. The measure became law a year ago and, as forecasted, jumpstarted growth in an economy that had been largely stagnant since the Great Recession. Unfortunately, tax reform has so far not lived up to its promise of paying for itself with that increased growth. In fact, the deficit for the 2018 fiscal year, which ended in September, is the largest in six years despite increased growth and revenues.

Figures from November show that the budget deficit was the largest ever recorded for that month. The Treasury Department reported Thursday that federal spending increased by 18 percent to $411 billion for the first two months of FY 2019.

Despite the tax reform and the increased tariff taxes on trade, revenues were flat at $206 billion, about half of what the government spent. The deficit of $205 billion, 49.8 percent of spending, was almost twice as high as last November’s $139 billion deficit. Increased tariffs led to an 86 percent increase in customs duties received but still only accounted for $11.8 billion in revenues.

As Resurgent noted in October, the deficit problem is two-fold. Data from FY 2018 show that while individual tax receipts increased by one percent, overall tax revenues were flat because corporate tax receipts fell by 30 percent. Total federal receipts were $3.329 trillion in 2018 compared with $3.316 trillion in 2017.

The other side of the coin is that spending continues to increase while revenues are stagnant. Military spending increased by 27 percent over the same two months last year per the Wall Street Journal[DT1] . Interest payments on the ever-growing national debt increased by seven percent, partly due to higher interest rates.

The core problem is that the economy is growing but borrowing and spending are growing even faster. Over the past 12 months, spending increased by 5.1 percent while revenues only increased by 0.2 percent. The Trump Administration says that deficits will shrink in coming years as tax reform spurs growth and investment. In the meantime, the deficit is expected to reach the Obama-esque level of $1 trillion in the current fiscal year.

Other factors will drive increased spending that will compete with growth in coming years. Spending on Medicare and Social Security is projected to rise as more Baby Boomers retire. Interest payments on the debt will also increase as the Fed raises interest rates.

In the meantime, Trump Administration trade policy counteracts the economic benefits of tax reform. While businesses benefit from lower corporate tax rates and deregulation, tariffs and trade restrictions make it more expensive and difficult to import and export raw materials and finished products.

As the deficit rises, there is little reaction from either party in Congress. Where Republicans went to the mat to curb President Obama’s spending, most seem to have no qualms about the spending increases under President Trump. In fact, the big news on the budget lately is that Republicans are prepared to shut down the government if Democrats don’t agree to authorize even more taxpayer dollars for President Trump’s pet border wall project.

Originally published on The Resurgent

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