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On Monday, the Congressional Budget Office (CBO) released its semiannual report on federal spending. The report, The Budget and Economic Outlook: 2018 to 2028, looks at trends in federal spending, budget deficits, and the share of the national debt held by the public. If one is looking at the report through the lens of fiscal conservatism, the picture is ominous to say the least.
Prior to the release of the latest report, the CBO last released an update of the report in June 2017. At the time, the congressional scorekeeper projected that the annual budget deficit would remain under $1 trillion until 2022, when it would begin to rise, eventually hitting $1.4 trillion in 2027. In this new report, however, the CBO now projects that the annual budget deficit will surpass $1 trillion in 2020, and fall shy of $1 trillion by only $21 billion in 2019.
Although these numbers and the fact that spending is increasing more rapidly under Republican control is concerning, the budget deficit as a percentage of gross domestic product (GDP) also a figure that deserves attention. For comparison, in 2009, the budget deficit was $1.412 trillion. As a percentage of GDP, the deficit was 9.8 percent. In 2028, when the budget deficit is projected to be $1.526 trillion, the anticipated deficit as a percentage of GDP will only be 5.1 percent.
This is unsurprising, as the $1.412 trillion budget deficit under Obama was the result of a stimulus package meant to spend our way out of the recession, and boost a struggling economy facing a GDP that was falling year after year. Today, as a result of the recent tax reform legislation, GDP is expected to rise year after year, resulting in a lower percentage of GDP for higher deficit spending in 2028 than seen in 2009.
While it is good news that the economy is growing as a result of tax reform, such high deficits pose a large threat when the economy takes a turn south, and deficits are still at historically high levels as projected by the CBO. Furthermore, every dollar the U.S. spends that it doesn’t have adds to the national debt, which is already over $20 trillion and still rising.
As a percentage of GDP, the national debt held by the public currently stands at around 77 percent. In its prior analysis before recently enacted legislation, the CBO projected that this percentage would increase to 91.2 percent by 2027. The CBO does not include intragovernmental holdings in its analysis of the national debt, only the share of the national debt held by the public. Including intragovernmental holdings, as of today, the national debt is $21.126 trillion, of which $15.457 trillion is debt held by the public.
In the new report, the national debt held by the public projected to be 94.5 percent of GDP in 2027 and 96.2 percent in 2028. Putting the country in a position where debt held by the public nearly eclipses the size of the economy is incredibly fiscally dangerous. It is disappointing that such projections are made at the hands of those in Congress who claim to be fiscal conservatives.
Such large deficits and massive sums being added to the national debt under unified Republican control is flatly unacceptable. The CBO report cites the recent tax reform legislation, the Tax Cuts and Jobs Act, as a significant contributor to these dismal realities, but also cites the more recent legislation -- the Balanced Budget Act of 2018 and the Consolidated Appropriations Act -- as contributors as well.
Fiscal conservatives have said time and time again that tax cuts must be followed by spending cuts. Tax cuts boost the economy and increase GDP, but due to decreased revenues in taxes, also add to the deficit. Republicans followed through on the first of these measures by passing the Tax Cuts and Jobs Act, but failed to do the latter, despite running campaigns year after year on the need to “cut spending.”
Had the second promise been followed up with spending cuts, our debt and deficit situation would look much more promising. The CBO report highlights the positive effect that tax cuts have on the economy, affirming the long-held fiscal conservative argument that tax cuts and spending cuts spur economic growth, while stimulus spending does not.
The CBO reported that the “largest effects on GDP over the decade stem from the tax act,” while “the other two laws are estimated to increase output in the near term but dampen it over the longer term,” citing the Bipartisan Budget Act and the Consolidated Appropriations Act as providing the economy “fiscal stimulus.”
It should concern conservatives that their spending measures are considered by experts to be “stimulus” spending -- something that conservatives cried out loudly against when President Obama did it.
Under reconciliation instructions followed last fall, it was known that Tax Cuts and Jobs Act would increase the deficit on a static basis by up to $1.5 trillion over a ten-year window. It has been seen, very clearly, that this legislation would also stimulate the economy to a large degree on a dynamic basis, and this is confirmed by the CBO’s new report.
It also confirms what we know to be true: that Republicans must both cut taxes and cut spending to return our country to fiscal sanity. Profligate spending will not do.
Jason Pye contributed to this blog post.