Some of us are old enough to remember a time when the Republicans claimed to be the fiscal disciplinarians of US politics. It hasn’t been true since World War II, but it’s become an accepted staple of political myth-making. However, Donald Trump and the current GOP might finally kill the lie off for good.
According to the Congressional Budget Office (CBO), the US will return to trillion-dollar annual budget deficits from 2020 onwards as the tax cuts pushed by Trump and Republicans, and higher public spending, strain America’s finances. The deficit will be US$804 billion for the current financial year, which ends on September 30, a big rise from the US665 billion deficit for fiscal 2017 and US$242 billion more than the CBO projected last (northern) summer. The increase is due, the CBO says, to the Republicans’ tax cuts. And they don’t buy the Laffer Curve nonsense peddled in the US and here by tax cut advocates, that company tax cuts will be so stimulatory that they’ll produce a net tax revenue increase.
The US hasn’t run deficits exceeding a trillion dollars since it was recovering from the recession induced by the financial crisis in 2012. Back then, of course, Republicans were strident critics of deficits, but have remained silent as Trump has opened the spigots, and done so when unemployment is less than half the level of 2010-12. The CBO’s outlook shows the level of fiscal stimulus will sharply lift economic growth this year, before the expansion loses momentum as the Federal Reserve lifts interest rates.
Given the rising deficits, the CBO now predicts that government debt held by the public will swell to nearly 100% of US gross domestic product at the end of the 2020s. That would be the highest level since 1946 and more than twice the average over the past five decades — and would increase the likelihood of a “fiscal crisis” in the US, according to the CBO. And if the US economy slows, then debt and deficit will rise even faster.
But even worse, the CBO says its figures very likely underestimate the size of the deficit. It is required to calculate the effects of the laws as written, which means the CBO has to assume the unlikely event of deep cuts to discretionary spending by Congress, as mandated under current budget laws. This includes defence, infrastructure, medical research, crop supports and subsidies and many other areas of outlays. Despite demands from some Republicans that Congress “starve the beast” and use the tax cuts as an excuse to slash spending, neither party actually wants to implement deep cuts to these programs, especially in an election year. That is why the Republicans and Democrats agreed in March to ignore spending cuts mandated in a previous budget agreement.
The CBO projections also assume significant tax increases toward the end of the 2020s because the Trump tax cuts were designed to give permanent cuts to corporations and heirs of large estates, but linked these to temporary, expiring personal tax cuts for the middle class. Trump and the Republicans were forced to do this because the US$1.5 trillion budget limit did not allow them enough money to cut all the taxes they wanted to cut. If those personal tax cuts are renewed in the mid 2020s, then the fiscal outlook will be even bleaker.
Post-war fiscal history suggests that the only thing that will really curb the US deficit is an extended Democrat occupancy of the White House. Given GOP concerns about an electoral “blue wave” coming crashing toward them because of Trump, that might yet spare us from trillion-dollar deficits.
“…it’s become an accepted staple of political myth-making.”
Same as here, where the LNP are apparently considered to be better economic managers. The LNP’s only claim to better economic management has been to be around when things outside their control worked in their favour, and to not being around when things outside their control went to hell.
Nicely put DB.
We are in good hands.
Sounds like Talcum’s business tax cuts will work a treat…NOT!!
Yay for the Laugher Curve!
The man hizoneself pled in later years that he want just giving a back of the napkin example of reductio ad absurdum to the minor officials of the Ford administration, gofers name of … Cheney & Rumsfeld.
“I used it all the time in class – why would anyone take notice of me?”
Republicans or democrats makes little difference, the US is in trouble either way. We just had 8 years of Democrat Obama, it didn’t work the magic.
the U,S conservatives, in lock step with the British Tories were responsible for the great depression and are determined to bring it on again, the rich love recessions, they can buy everything cheaply with no thought or care for the damage they cause.
“U,S conservatives, in lock step with the British Tories were responsible for the great depression”
I am unsure of the expression but I think it is something like “are you serious”? The G.Depression was caused (just read the history) by the same idiocy that the Mae, Mac and others engaged in. Stock was sold (by 1929) to anyone who had 5% – while the market was going through the roof. In the case of Mae etc “no one” thought that the effects could be/would be country-wide or even multiple state-wide. Similar conjectures circulated about Wall St. A few bubbles would burst; that was enevitable – even the press (of the day) conceded that point. But to bring down everything : hell no.
By this time the “Tories” were doing what they could to recover solvency by marrying their daughters into wealthy American families. There was a second market in this kind stuff along the French Riviera and elsewhere in Switzerland. Unconvinced?Read Scott Fitzgerald or anyone of that era. Galbraith wrote upon the phenomenon more formally in his sociological/economic books for the layman. He expressed the behaviour as “solvency for the British and respectability for the Americans”.
Newly flushed up the newer families (not so much the older families) had a crack at the market and indeed at the tables. The two (recovered wealth and any nong with 5%) conspired to create a situation where the share price of a company possessed no relation
to its assets. Then on 29 October it all came apart.
Do you think a good deal of the wealthy were unaffected? Take a look at the peak of suicides for the five year interval 1929-1934 (and I am referring to the “up” part of town. Indeed take a look at the stats for the UK and Australia; forget the USA for the moment.
> and are determined to bring it on again, the rich love recessions
It isn’t so much a case of the rich “loving” recessions Brian as to their capacity to endure them but to suggest that the rich prefer recessions so as to effect economical purchases is to wonder what you had to accompany your dinner. If the economy is contracting then, by definition, are the businesses of the rich. The extreme case of the Great Depression is an illustration in point. Or were the rich just too happy “buying cheep”? If such was the case the rich would have had an interest not to recover from the recession. (I’ll call a halt to the reductio ad absurdum here).
You’l find that it was Keynes who (more or less single-handedly) convinced the top end of town to adopt, by the day, unorthodox measures. Then, if you recall your school history, there was bliss for about thirty years after the 2nd war. Point made ?
oh dear – here we go. Does anyone remember just how Reagan defeated Carter? Well, in a nutshell, Reagan, quite by accident, policitised the religious Right; until 1980 that group didn’t vote. Secondly Jimmy was just too intellectual, as it turned out – over four years – for the average yank. Screwing up the hostage thing didn’t help. But the real effect was Reagan and the budget. Reagan was going to sort it out for good. The deficit, as events happened, actually increased under Reagan’s administration!
Second point : the productive capacity of the USA is such that the deficit doesn’t matter a damn. All the securities/bonds/Treasury bills etc can be
backed with tangible assets. Not true for (e.g.) Greece etc. and hence the illustration. The USA cannot produce competitively but it can, in participle produce. Another war will illustrate the foregoing point.
Lastly, a fair percentage of the US budget is non-discretionary. Does anyone think that the deficit will make a damn of difference to the economy (given that world fiat is what).
Also, do we expect the Forbes list to get fatter? (I don’t mean longer – just an increased share of the GDP) Now can we move on to some real issues please?