Study says Trump tax cuts risk another financial crisis

The tax cuts championed by President Donald Trump are helping push the nation toward an unprecedented level of debt, heightening the risk of another financial crisis, according to the nonpartisan Congressional Budget Office.

The budget office’s annual look at the government’s long-term financial outlook paints a grim picture, projecting soaring deficits in the coming years, with debt ultimately peaking at more than 152 percent of the nation’s gross domestic product.

“The prospect of large and growing debt poses substantial risks for the nation and presents policy makers with significant challenges,” Keith Hall, director of the budget office, said in a statement.

The federal debt currently stands at about $15 trillion, or 78 percent of the size of the U.S. economy. If current trends continue, it will roughly equal the size of the economy within a decade, the budget office said. The last time the debt burden hit that level was just after World War II.

The biggest problem in the coming decade stems from last year’s tax cut. It is estimated to increase the deficit by more than $2.3 trillion over the decade.

More red ink

But if Congress balks at that big tax increase — many members of Congress already have said they want to make the individual cuts permanent — the red ink would be even worse than projected, the budget office said.

The budget office did not offer a specific projection of the more pessimistic scenario, but the bipartisan Committee for a Responsible Federal Budget, an advocacy group, crunched the numbers and found that if the individual cuts were kept in place, federal debt would be twice the size of the nation’s economy, and annual deficits would exceed 13percent of the GDP over the next 30 years.

The impact of the tax cut comes on top of a preexisting problem — the spiraling price of providing subsidized health care and Social Security for the huge baby boom generation as it moves into retirement, the budget office said.

Most of the rest of government spending is projected to decline, relative to the size of the economy, the report said. The one big exception is interest payments, which will rise as the debt increases.

Debt at the level the U.S. is currently piling up could have serious consequences, the budget office warns. The high level of red ink increases the likelihood of a fiscal crisis, threatens to reduce the income of average Americans, and gives lawmakers limited options to deal with big events that require a government response, such as another deep recession.

Rising debt also threatens to weaken the global power of the United States as it increasingly depends on foreign investors to lend money to the Treasury, the report noted.

What makes the rapidly increasing debt particularly striking is that it’s happening at a time when the U.S. is at peace and the economy is booming. The previous high point for the debt came when the nation was deep in the red from the effort to win the world war and the public works projects implemented in response to the Depression.

More recently, the U.S. plunged back into a high debt to combat the Great Recession, when Congress passed major spending increases to pull the nation out of it. But Washington not only failed to wipe out the red ink when the economy rebounded, after a few years of progress in President Barack Obama’s second term, the government under Trump has reversed course, moving toward even higher debt levels.

17 percent hike?

Many economists feel that borrowing money to cope with an emergency of that sort makes sense — ultimately, the country emerges better off. But a big increase in the debt in the absence of any such emergency is more problematic and illustrates how the country’s intractable deadlock over taxes and government spending has led to a result — rising debt — that both parties claim to oppose.

For the next decade, the national debt is projected to surge, bringing the nation into uncharted territory unless the government adopts far-reaching policy shifts that could include deep cuts in spending on entitlement programs or significant tax increases.

To bring the red ink down to the historical average level, taxes would need to increase 17 percent — $2,000 per household — or government spending would need to be cut by 15 percent, the report says.