Despite the strong economy, the Treasury Department reports that the federal budget deficit surged 77 percent in the first four months of the 2019 fiscal year. The total deficit for the current fiscal year, which began on Oct. 1, has already reached $310 billion compared to $176 billion for the same period last year per the Washington Post.
While it is tempting for the two parties to point fingers at each other over the increase in the deficit, the truth is that both are to blame. The tax reform bill caused corporate tax revenues to plummet by about 25 percent, equivalent to a $17 billion drop in revenues. At the same time, spending increased by nine percent. The largest increases were for Medicare, which grew by 16 percent, and military spending, which grew by 12 percent.
“It’s big tax cuts combined with big increases in spending when they already had big deficits,” said former Senate Budget Committee Chairman Kent Conrad (D-N.D.). “So, guess what, it’s craziness.”
White House economic advisor Larry Kudlow told The Post, “We are making an investment in America’s future… and if that means we incur some additional debt in the short run, so be it.”
“Growth solves the problem,” Kudlow added. “That will solve all of these problems and people will be very prosperous.”
In theory, the reductions to the corporate tax rate will spur investment. The resulting economic growth will reduce the deficit as a share of GDP and make the problem less pressing.
So far, that has not happened. As Resurgent reported last October, federal revenues were flat for the 2018 fiscal year. Total federal receipts were $3.329 trillion in 2018 compared with $3.316 trillion in 2017. Tax revenues from individuals increased by one percent but were corporate tax revenues fell by 30 percent. FY 2018 included three months — October, November and December 2017 — at higher tax rates. This means that the 2019 revenue picture looks even worse. Even though federal revenues did not fall after tax reform, the fact that they did not increase as they would have in a growing economy is a contributor to the growing deficit.One drag on economic growth is President Trump’s trade war. Tariffs have impacted segments of the US economy and uncertainty over future trade policies could cause companies to scale back expansion plans. Many economists predict a slowdown in growth in 2019 due to the taxes on international trade.
Prior to the tax reform, the United States had the third highest corporate tax rate in the world. While tax reform was needed to make American companies more competitive in the global marketplace, Republicans completely dropped the ball on getting federal spending under control. During the Obama Administration, House Republicans under John Boehner forced the first real spending cuts in consecutive years for the first time since the Eisenhower Administration, but fiscal restraint has been sorely lacking during the Trump Administration. Where Republicans went to the edge of the fiscal cliff to force spending cuts under Obama, the GOP forced a government shutdown last December to try to force Congress to borrow and spend more money for a border wall.
Prospects look bleak for any deficit reduction in the near future. Entitlement programs such as Social Security, Medicare, and Medicaid make up more than 60 percent of federal spending but President Trump has consistently refused to consider cuts to entitlement programs. This is not without good reason. Even conservative Republican voters balk at cutting these programs and many refuse to even acknowledge that they are entitlements. Paul Ryan, the GOP’s chief advocate for entitlement reform, has returned to private life.
The third largest spending program is the military, which represents about 16 percent of all federal spending. The Trump Administration is about to propose increasing military spending by shifting defense funds to an account for Overseas Contingency Operations. These funds are not capped under the Budget Control Act, unlike traditional military spending.
The increased borrowing comes at a particularly bad time since interest rates are beginning to rise back to normal rates following the recovery from the Great Recession. The government is forecast to spend $383 billion on interest payments this year. By 2022, that amount will increase to about $581 million, almost as much as we currently spend on defense.
As the old saying goes, to get out of a hole, the first step is to stop digging. The United States has yet to take even this first basic step. Thus far, the only thing that the parties have been able to agree on is to keep spending at ever greater levels. With the US national debt already at more than 100 percent of GDP and the deficit projected to be at more than $900 billion for the year, American debt is approaching Greek and Italian levels. If there is a national emergency, it is the looming debt crisis, but no one in Washington seems to care.
Originally published on The Resurgent