With the Republicans’ new national agenda in a state of flux just a month before President-elect Donald Trump takes the oath of office, some budget and tax analysts are warning of a dimming fiscal picture that could drive up the national debt to even more troubling levels.
Trump and House and Senate GOP leaders have boasted they will roll to important victories during the first nine months of 2017, including swift repeal of the Affordable Care Act, a massive tax cut for individuals and businesses, final action on a new $1.1 trillion annual budget including more funds for the military, and even initial skirmishing around efforts to cut or overhaul Medicare.
But there is enormous uncertainty over how these historic legislative dramas will unfold next year, especially with regard to the Republicans’ timing in trying to repeal and later replace Obamacare without touching off mass panic among consumers, insurers and the health care industry. Fissures already are developing between House and Senate GOP leaders over whether Medicare reform and even changes in Social Security should be part of the health care discussion.
And House Ways and Means and Senate Finance Committee Republican leaders have differing views on the size and makeup of the historic tax cut that Trump has promised Americans.
Treasury Secretary Jack Lew this week blamed the Republican-controlled Congress for missing an important opportunity by resisting major tax reform, including lowering tax rates and closing loopholes, during President Obama’s second term. He cautioned the incoming Trump administration and Republican leadership against reckless tax cuts that would drain resources from domestic programs and likely drive up the debt even more.
“What we can’t do is spend a lot of money having a tax cut that loses revenue because that’s just going to shift the burden somewhere else,” he told Fox Business Network’s Maria Bartiromo on Tuesday.
A new analysis this week by the Brookings Institution cautions that the fiscal outlook for the U.S. “is not promising” and is “likely to get worse soon.”
Echoing the warnings of the non-partisan Congressional Budget Office and anti-deficit groups, the new report notes that the current $11.7 trillion publicly held debt is equivalent to 77 percent of Gross Domestic Product – or the highest level relative to the economy in U.S. history, except for a few years around World War II.
“Additionally, we are on the cusp of the full-on retirement of the Baby Boom generation, which will increase spending on Social Security and Medicare,” the analysis states.
The report was prepared by William G. Gale, a senior fellow in economic studies at Brookings and the co-director of the Urban-Brookings Tax Policy Center, and Aaron Krupkin, senior research analyst at the Urban-Brookings Tax Policy Center.
Their findings suggest a worsening long-term debt picture than earlier projections by the CBO. They also suggest that the fiscal situation could get out of hand if Trump and the Republicans forge ahead with major tax cuts and new spending without concern about the long-term economic consequences.
In Gale and Krupkin’s latest policy projections, the publicly held debt will rise to 93 percent of GDP by 2026 and 150 percent by 2046. And that’s even if they assume the economy is near full employment the entire time, and that there are no new wars or crises that would further drain the coffers.
These projections are remarkably conservative and assume there will be no new major changes in taxes or spending – which we all know will not be the case. Trump and the House Republicans have unveiled tax plans that would slash federal revenues by $6 trillion and $2.5 trillion, respectively, according to Tax Policy Center and Penn-Wharton Budget Model estimates. And that’s even after accounting for the positive effects on economic growth that Trump and the GOP are claiming.
“But leading Republicans have sent mixed signals about how big any tax cuts will be, with some Congressional leaders suggesting their plan will be revenue neutral. Trump claims that economic growth would reduce the cost of his plan to $2.6 trillion and that the revenue losses would be made up by spending reforms, trade, energy programs, and regulatory reform,” Gale and Krupkin wrote.
The Committee for a Responsible Federal Budget calculates that when taken together, Trump’s tax and spending promises – including his pledge to boost military spending and make cuts in non-defense discretionary programs- would drive up the debt to 105 percent of GDP within a decade.
The CRFB report doesn’t account for the $1 trillion of new infrastructure spending that Trump promised during the campaign. By including that, the debt figures would go higher. However, they also do not account for increased economic growth and lower government spending.
Senate Majority Leader Mitch McConnell (R-KY) tamped down expectations last week by telling reporters he wants to avoid “a $1 trillion stimulus, according to the Associated Press. And GOP national party chair Reince Priebus, Trump’s designated new White House chief of staff, said in a radio interview that the new administration intends to focus mainly on repealing Obamacare and tax reform in the first nine months while ducking a question about infrastructure.
The one “silver lining” in the Brookings’ projections are low-interest rates that are keeping the debt from crowding out private investments in the economy, the report concluded. But even there, clouds are gathering on the horizon following the Federal Reserve’s decision last week to approve a minuscule hike in interest rates.
The Fed announced an increase in the federal funds rate of 25 basis points. This still leaves the U.S. with extraordinarily low-interest rates. “But historically, when the Fed has begun raising interest rates, it often follows up with a succession of rate increases,” the report stated. “Second, even if the Fed increase was undone and rates stayed constant over time, debt would still rise to about 119 percent of GDP by 2046.”