The recently enacted tax bill is an important component of the Republican effort to boost economic growth and wages. The Joint Committee on Taxation has confirmed that the legislation will increase GDP by about 0.7 percent over the coming decade. The legislation would expand employment by the equivalent of 900,000 new full-time jobs.
But Republicans could squander this success if they do not couple the tax bill with a plan to address the mounting fiscal challenges of the federal government. At some point, rising federal deficits and debt will become a drag on long-term economic growth, thus undermining the pro-growth aspects of the tax legislation.
JCT estimates that the added growth from the tax bill will reduce the revenue loss from the legislation from $1.5 trillion over 10 years to about $1.1 trillion. But $1.1 trillion is still a lot of money — especially since the government was already expected to run large deficits in coming years even without a tax cut.
The Congressional Budget Office (CBO) projects on a static basis that, with the tax bill now included in its forecast, the federal government will run a cumulative deficit of $11.9 trillion over the period 2018 to 2027; with stronger growth, the projected cumulative deficit falls modestly to $11.5 trillion. CBO expects the budget to exceed $1 trillion in 2019 and equal 4.7 percent of GDP. The federal government ran an average deficit of 2.3 percent of GDP over the period 1967 to 2008. And CBO forecasts a deficit of 5.3 percent of GDP at the end of 10 years, in 2027. The deficit will keep widening thereafter as the population ages and health-care spending continues to increase at a rapid rate. By 2047, CBO projects federal debt will reach 150 percent of GDP — even without the tax cut — up from 39 percent of GDP in 2008.
While these projections are alarming enough, they are probably overly optimistic because they do not include the budgetary effects of other policy changes that are widely supported in Congress and by the Trump administration. CBO’s current baseline projections assume appropriations for defense and non-defense accounts will decline from a total of 6.3 percent of GDP in 2017 to an average annual level of 5.5 percent of GDP from 2023 to 2027. Total discretionary spending has never been that low as a percentage of GDP in the post-war era.
Moreover, Republicans are determined to increase defense spending well above the baseline projections, and Democrats are pushing to do the same for non-defense accounts. CBO estimates the Trump administration’s plans for expanded military spending would exceed the caps assumed in current law for defense appropriations by $295 billion from 2018 to 2022. Given current pressures, it is reasonable to expect that the total of defense and nondefense spending will be at least 1 percentage point of GDP higher in 2027 than the 5.5 percent of GDP projected in CBO’s current forecast.
Furthermore, the Trump administration is readying a plan to expand federal spending on infrastructure projects as part of its 2019 budget submission to Congress. The plan will likely be paired with savings elsewhere in the budget. But there is no guarantee that congressional Democrats will agree to the offsets. The only certainty is that there is strong bipartisan support for higher spending on roads, bridges, and other projects.
The pressures for more spending would be less worrisome if there was evidence of a politically realistic plan for restraint in other parts of the federal budget. In particular, it is long past time for leaders from both parties to embark on a concerted effort to lower the costs of the major entitlement programs, which have been the primary sources of spending growth in recent decades. Unfortunately, the prospects for getting any kind of far-reaching entitlement reforms through Congress are very remote. President Trump campaigned against changing Social Security and Medicare. And Democrats successfully demonized GOP efforts to scale back Medicaid in 2017.
With these obstacles standing in their way, Trump administration officials may be tempted to once again include in the president’s budget plan implausible cuts in domestic accounts as a way of creating the perception of fiscal sobriety. In its 2018 budget, for instance, the administration assumed non-defense accounts would cost just $429 billion in 2027, down from $619 billion in 2017. But instead of cutting these programs, Congress is poised to add billions of dollars to them as part of a bipartisan deal to keep the government open. There is little prospect of Congress enacting any cuts in this slice of the budget anytime soon, much less the massive downsizing projected in the president’s 2018 plan.
Republicans would be better off trying to put together a down payment on deficit reduction in 2018 based on mid-size changes in entitlement programs. While this would fall short of major entitlement reform, it would still constitute progress. The legislation should include spending increases for things like infrastructure to improve its political appeal. The overall net effect should be a level of deficit reduction — perhaps $300 or $400 billion over a decade — that would be substantively meaningful and politically impressive.
Where to cut? The president says he does not want to reform Medicare. But there are many ways to reduce Medicare’s projected costs that would not constitute a major reform of the program. Among other things, the Medicare Payment Advisory Commission has produced scores of ideas for payment adjustments that would improve the program’s efficiency and reduce federal spending. Similar cost-cutting ideas could be pursued in Medicaid, farm programs, and federal civilian pension and health benefits. It also may be possible to find cost-reductions in federal programs for student loans and housing support.
Over the past 30 years, many budget agreements were enacted in Congress using the reconciliation process — which meant that these deals could not be filibustered in the Senate — even though most of them passed with far more than 60 votes because they were the product of bipartisan compromise. It will be difficult to replicate that model in today’s polarized Congress. Even so, Republicans should set in motion a deficit-cutting reconciliation bill in 2018 even as they reach out to Democrats to enlist their support in the effort. The inclusion of some additional infrastructure spending in such legislation could prove important to making a bipartisan deal on deficit-cutting a realistic possibility.
In 2017, Republicans were able to pass a tax plan that many of them had been seeking for decades. It was a major political victory, one that will boost economic growth. But that victory could be short-lived if Republicans do not follow it up with steps to get the nation’s rapidly deteriorating fiscal situation under better control.