In news that shouldn’t surprise anybody considering the well-documented trend and also considering the country is run by the self-declared “king of debt”, whose penchant for bankrupting things is the stuff of legend, the Congressional Budget Office’s latest forecasts show the US traversing an even more perilous fiscal path than previously thought.
“In our projections, the federal budget deficit is $960 billion in 2019 and averages $1.2 trillion between 2020 and 2029”, the CBO said Wednesday.
The non-partisan group sees deficits oscillating between 4.4% and 4.8% of GDP over the next decade, which Director Phill Swagel notes is “well above the average over the past 50 years”.
The new projection for the 2019 deficit represents an increase of $63 billion over the last forecast, delivered in May. More worryingly (at least on the surface), the projection for the cumulative deficit over the next decade is now $809 billion larger than it was just three months ago.
“Deficits in the current projections are larger than those in the projections that CBO published in May, primarily because recently enacted legislation raised the caps on discretionary funding for fiscal years 2020 and 2021”, the CBO says in the report, adding that “the budgetary effects of new legislation were partially offset by revisions that the agency has made to its economic forecast since it was last updated in January 2019 [including] markedly lower projected interest rates [which] reduced the agency’s projections of borrowing costs”.
Note that the deficit is seen topping $1 trillion in FY2020. That’s two years sooner than previously forecast, and it will come just as Trump attempts to win a second term by talking up the economy which, by this time next year, may well be headed for a downturn.
Speaking of that, the CBO paints a rosy picture of recent economic performance, and delivers a generally upbeat take on how things will likely evolve, but the projections are nowhere close to the administration’s 3% growth target which, as noted on Tuesday, is now nothing more than a fairy tale.
Read more: Mick Mulvaney Said To Warn GOP Donors Of Possible US Recession
“The economy was strong in 2018 and the first half of 2019: Real (inflation-adjusted) GDP grew at an average annual rate of 2.5 percent, unemployment remained low, and wages rose”, the group said, before forecasting annual growth of 1.8% over the next decade, which, in addition to being laughably short of Trump’s goal, “is below the long-run historical average, primarily because the labor force is expected to grow more slowly than it has in the past”. Growth is expected to come in at 2.1% in 2019.
Note that the CBO cites “the effect of trade policies on business investment” as a potential factor weighing on growth.
The group’s commentary on the effect of the tax cuts is amusing. Consider this:
Actual revenues in 2018 totaled $3,330 billion, or $8 billion less than CBO projected in April 2018. Receipts from individual income taxes were 3 percent higher than CBO had projected, and receipts from corporate income taxes were 16 percent lower. As for fiscal year 2019, collections so far this year–and especially collections of corporate income taxes–have been lower than CBO expected in April 2018, so the agency now projects that 2019 revenues will total $3,451 billion, about 1 percent less than the estimate made in April 2018. One likely reason for the lower-than-expected receipts is that some parts of the economy have been weaker than CBO projected in April 2018–but in CBO’s assessment, that difference has not stemmed from errors in projecting the effects of the 2017 tax act on the economy. Some parts of the economy that CBO expected to be boosted by the tax act, such as investment in 2018, have proved consistent with CBO’s April 2018 projections. CBO estimated that the tax act would increase the growth of real (inflation-adjusted) business fixed investment in 2018 by 2.1 percentage points. Incorporating that effect, CBO projected that investment would grow by 5.9 percent in 2018, and current data show that it did grow by 5.9 percent. And although investment in 2019 has been weaker so far than CBO had projected, a number of developments other than the tax act appear to have contributed to that weakness, including increases in tariffs, greater uncertainty about trade policy, and slower economic growth in the rest of the world.
Here again, we see that the Trump administration’s trade policies are serving to effectively undermine the positive impact of the tax cuts, and don’t let it be lost on you that when the CBO cites “slower economic growth in the rest of the world”, that is in no small part attributable to US trade policy.
“In response to the tariffs, US trading partners have retaliated with their own tariffs. As of July 25, 2019, retaliatory tariffs had been imposed on 7% of all goods exported by the United States–primarily industrial supplies and materials as well as agricultural products”, CBO writes of the world’s response to Trump’s protectionist bent. Here is CBO’s summary of how the tariffs affect the US economy:
CBO’s analysis incorporates the assumption that the tariffs on U.S. imports and exports in effect as of July 25, 2019–the day the agency completed its economic projections–will remain in place through 2029. In CBO’s projections, those tariffs reduce U.S. economic activity in three ways. First, they make consumer goods and capital goods more expensive, thereby reducing the purchasing power of U.S. consumers and businesses. Second, they increase businesses’ uncertainty about future barriers to trade. Such uncertainty leads some U.S. businesses to delay or forgo new investments or make costly adjustments to their supply chains. Third, they prompt retaliatory tariffs by U.S. trading partners, which reduce U.S. exports by making them more expensive for foreign purchasers. All of those effects lower U.S. output.
If that sounds markedly different from the narrative being foisted upon the public by Trump and Peter Navarro, that’s because the administration isn’t telling the truth. The reality of the situation is that protectionism is a drag on growth, although as ever, there are mitigating factors, which CBO outlines.
You can read the full report below, but suffice to say it doesn’t paint a pretty picture.
“The nation’s fiscal outlook is challenging. Federal debt, which is already high by historical standards, is on an unsustainable course, projected to rise even higher after 2029 because of the aging of the population, growth in per capita spending on health care, and rising interest costs”, Director Swagel went on to caution.
Fortunately, fixing the situation is “easy”. “All” the US has to do, according to the CBO, is “make significant changes to tax and spending policies”, where that means “making revenues larger than they would be under current law [and] reducing spending below projected amounts”.
Those kinds of changes are always frictionless affairs that never devolve into partisan bickering. (There’s a lot of sarcasm there.)
During a pair of 2016 interviews with Sean Hannity, Trump expressed confidence he’d balance the budget in relatively short order.
“It can be done. It will take place and it will go relatively quickly”, then candidate Trump said. “If you have the right people, like, in the agencies and the various people that do the balancing… you can cut the numbers by two pennies and three pennies and balance a budget quickly and have a stronger and better country”.
Let’s call that a promise broken, shall we?
This is EXACTLY why when the bond desk looked like Best Buy on Black Friday the Fed and Treasury should have been SELLING everything they could and unwind as much as they could so when rates rise which they will they can have the ammo to keep rates from skyrocketing much like they did in Greece…. Don’t think it can’t happen, with Trillion Dollar Annual Deficits it could happen and will happen eventually maybe not this year or next year or even in 5 years but someday the rest of the world will have had enough of the U.S.A constant and consistent fiscal irresponsibility. They can’t keep printing money like they are for the last 10 years into infinity…. Something has to give, whoever is short treasurys when they reach the targets some are throwing out there near or equal to zero will be the next Gates, Buffett and Slim, when the bond market collapses which it eventually will it will make 2008 look like an cheap $1 fast food appetizer
Except, MMT says they can.
Obviously, this makes the idea of more tax cuts to avert a recession laughable.
Hence the Laughable Curve?
So receipts from corporations were 16 percent lower than CBO projections while they were 3 percent higher for individuals — many of whom faced a higher overall tax burden thanks to the elimination of the SALT deduction. That tells you everything you need to know about voodoo…er, supply-side economics: tax cuts almost always lead to lower receipts, while tax increases have the opposite effect (i.e., more revenue for the government). Someone please explain that to Kudlow and Art Laffer.
But, but, but ,,,, supply side tax cuts worked in the past! Well, once, back in 1963 when rates were cut from 80% or so. Maybe.
What a pair of damning statistics.
Real GDP grew over one-third during Reagan’s presidency, an over $2 trillion increase. The compound annual growth rate of GDP was 3.6% during Reagan’s eight years, compared to 2.7% during the preceding eight years… During the Reagan administration, fiscal year federal receipts grew from $599 billion to $991 billion (an increase of 65%)
https://en.wikipedia.org/wiki/Reaganomics
Never let facts stand in the way of a good theory.
That had less to do with tax cuts and a whole lot more to dow with the largest generation in U.S. history hitting their prime working years.
Didn’t Reagan increase taxes when he realised his tax cuts weren’t working? The reality now is that the deficit is growing and any comparison with Reagan isn’t germane.
Exactly. And Bush senior raised them as well. And Clinton raised them for the top earners, and we actually balanced the budget (for a year). Supply side has been an unmitigated disaster for the fiscal health of the country.
Sure, except for all the statistics that actually matter: GDP and tax revenue growth, employment growth, inflation going down from 10% to 4%. These are facts, whether you like them or not.
From the same wiki article:
According to historian and domestic policy adviser Bruce Bartlett, Reagan’s tax increases over the course of his presidency took back half of the 1981 tax cut.
Thus, you can argue that Reagan realized that he went too far in 1981 but you cannot argue that tax cuts didn’t work.
The deficit was growing back then as well so, as long as we are talking about supply-side economics, comparisons with Reagan are germane.
Who knew that hyperbolic growth rates designed to excite his dumbass base of retards would in fact be nothing but fluffy, retarded projections based on the hopes and dreams of his retarded groupies?
Nobel economist Paul Krugman says zero interest rate environment the ‘new normal’ ( 14 Jul, 2016)
“New York-based economist says US interest rates trapped in conditions similar to the 1930s for the foreseeable future
“The Fed really, really wants to raise rates. They may do it. The statistics doesn’t look so bad. But if the Fed does raise rates, it’ll be sorry. We’ll just be importing dollar strength,” he said.”
Why are you discussing conditions from 3 years ago?
Sure, except for all the statistics that actually matter: GDP and tax revenue growth, employment growth, inflation going down from 10% to 4%. These are facts, whether you like them or not. What do any of those have to do with supply side? Growth in GDP, epmployment, and tax revenue were all a function of huge numbers of boomers putting down their bongs, forming households, and becoming excellent consumers (with a great penchant for debt). Inflation went down thanks to Paul Volcker and globalization. The benefits of supply side are a myth.
Here’s what it has to do with supply-side: massive tax cuts lead much reduced tax burden on the population and to much improved economy, as advertised. What was the disaster?
That’s a theory. Correlation does not equal causation. Massive tax cuts lead to massive deficits; that’s established fact. No solid empirical evidence that they lead to growth. Sorry.
Well, no: tax cuts lead to (or at least were followed by) massive growth in tax receipts. What led to deficits was the spending growth.
You did not explain the “unmitigated disaster” though.
Some growth in tax receipts, massive growth in deficits, which required massive borrowing, which crowded out lots and lots of the private sector investment, leading to a three-decade regime of financial repression and the slow extinguisihing of animal spirits in the economy — i.e., the massive and accelrating deficits are the unmitigated disaster, and they’re a function of BOTH lower receipts and undisciplined spending.
supply-side economics is a laughing stock with a track record on par with Donald Trump’s business career. everybody knows that. this is why the people you see pushing it are, in many cases anyway, sock puppets without economics degrees. e.g., Stephen Moore and Larry Kudlow. It is such a standing joke that most economic satirists barely think it’s worth the time to lampoon, including me. supply-side economics does not work. period.
Yes, I am fully aware of the prevailing in the liberal circles opinion that laughter is a great substitute for the argument. However, facts are what they are and they get to have the last laugh.
So, tell us about the Kansas experiment.
I’m not sure what you’re talking about. the facts do not support supply-side economics. it is the opposite of that. i mean, i’m not trying to be derisive here, but i feel like maybe you aren’t all that familiar with this debate. this isn’t a situation where it makes much sense to argue the side you’re trying to argue — even a trained economist trying to play devil’s advocate would have a difficult time with it. the body of evidence is so overwhelming that implicitly asking me to cite it is like asking someone to cite evidence to support the contention that the earth is round. it doesn’t seem like you are aware of this reality, which is certainly fine, it hardly makes for compelling reading for most people, but i would definitely encourage you to go to Google Scholar and spend a week or two just reading peer-reviewed academic journal articles on the subject. what you are trying to argue isn’t reality. that’s about the best way i can describe it.
Scholar google never heard of it. Thank you. Need to understand my sill so that i may properly poke it.
https://scholar.google.com/
@heisenberg
I cited most relevant statistics characterizing the American economy under Reagan. The facts are very stubborn. No amount of academic literature will convince me that the country did not prosper under Reagan. Just like (I hope) the same peer-reviewed academics did not convince you that the Efficient Market Theory is true, or did they?
@mfn
Sorry but you are not making a lot of sense.
First, you agree that tax receipts grew and the deficits are due to spending growth, but in the end you return again to the untruthful claim that tax receipts were lower. I’m not sure the latter is a part of supply-side economics that we are debating. Because if it is then we live under supply-side economics ever since – surely you know that spending only goes up and up and up. Then I don’t know what we are debating. It is fair to say that it was under Reagan that we started to grow massive budget deficits. One can blame it on Reagan personally or on the democratic Congress, or on both. Some people say today that massive deficits don’t even matter anymore. I only say that it has nothing to do with supply-side economics and that most of the debt was accumulated under subsequent presidents. Yes, it happened after Reagan, but after doesn’t equal because.
I have no idea what you call “financial repression” or “animal spirits”.
I messed up a little bit. What I meant was:
I’m not sure the spending growth is a part of supply-side economics ….