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.
“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.)
“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?