We have a winner for the most predictable headline of the year: the federal budget deficit has increased to $779 billion a 17 percent increase from projections. Of course it has. This year’s major legislative accomplishments have been passing a major, unpaid for, tax cut and a major, unpaid for spending increase. The math is simple: when Congress spends more money than the government takes in, the difference in the two numbers is the deficit. The Congressional Budget Office and the Joint Committee on Taxation forecast that the 2017 tax package would increase annual deficits by more than a trillion dollars over 10 years (even with macroeconomic effects), and the spending increases would add more than $300 billion to deficits over the next two years.
These are today’s numbers. Revenues for FY2018 were $3.3 trillion – essentially the same as FY2017. Flat revenue after a big tax cut sounds good, but the numbers point to future trouble. Compared to the prior 12 months, revenues increased by $29 billion in the quarter covered by the old law but decreased by $15 billion over the nine months covered by the new law. And this revenue decrease is taking place at a time of economic growth and relatively high employment. Over the last four quarters, Gross Domestic Product growth has averaged nearly 3 percent and over the last year the unemployment rate has dropped 0.7 percentage points to 3.7 percent.
Of course, one year doesn’t tell the whole story of the tax law. Nor does it support the rosy picture that the tax cut will pay for itself. Despite all evidence to the contrary, we continue to hear that in time the growth resulting from the tax cuts will make the bill revenue neutral. The non-partisan congressional scorekeeper, the Joint Committee on Taxation, estimated the economic growth induced by the tax cut would reduce the cost of that tax cut by roughly 26 percent over 10 years. That projection assumes the “temporary” tax cuts for individuals which expire in 2026 are not made permanent, which congressional leadership has said they intend to do. It also assumes consistent economic growth. All bets are off if we experience a recession.
Turning to the spending side of the ledger, although the 2011 Budget Control Act set discretionary spending levels for the subsequent 10 fiscal years, Congress has adjusted those limits upwards four times. Unlike past adjustments, the Bipartisan Budget Act of 2018 abandoned any pretense of offsets and created a new definition of compromise: everyone gets what they want. No setting priorities or making hard choices. Instead, Congress chose to boost spending across the board by more than $300 billion, adding to the budget deficit.
The increase in the deficit in 2018 is largely the result of reducing revenues through the tax cut and increasing spending. Under the old tax law, revenues were projected to be $202 billion more than the revenues actually received. Entitlement programs, which pose a fiscal challenge in the long term, account for a relatively minor portion of this year’s deficit increase.
So the country now finds itself deficit spending at a close-to-unprecedented level in a time of economic growth. That, in turn has contributed to the largest debt as a percentage of GDP since shortly after World War II. As a result, the costs of our debt service are slated to be more than we will spend on the Pentagon by 2028. In FY2018, interest payments set the taxpayers back $316 billion, or 7.6 percent of federal spending. In 2019 the corresponding numbers will be $390 billion/8.7 percent. In 2022: $643 billion/12+ percent.
This is a mess of our own making. When something looks too good to be true, it probably is. Can the next Congress show the leadership necessary to move us towards a more sustainable fiscal path? Doubtful, no matter who’s in charge. Fiscal discipline played no role in this Congress, nor is it a campaign theme. If Republicans retain control of Congress, voters may find it hard to swallow entitlement reform – which has the greatest impact on middle-income voters – as a means to deficit control after the huge tax cut that has the greatest impact on high-income voters. If Democrats gain control of one or both houses, they are clear about advancing priorities that cost money, starting with health care.
Wishful thinking won’t solve the problem. Reducing the deficit can only be accomplished by addressing the long term challenges to entitlements, cutting spending, and raising taxes.