Budget deal may pour gas on economy running hot
WASHINGTON — If the GOP’s $1.5 trillion tax-cut package powers the American economy like rocket fuel as President Donald Trump predicts, the new congressional budget deal could, if passed, become the extra boost that causes the engine to overheat.
The budget compromise that was struggling late Thursday to win passage provided a bipartisan answer to the latest fiscal crisis. But lawmakers did so by raising spending caps on military and non-defense programs that would add $300 billion to $400 billion to the deficit.
Coming on top of the tax cuts passed late last year, the increased spending caps — plus tens of billions of additional money for hurricane relief — would throw more fuel to an economy that is already perking up.
Analysts say that raises the odds of higher inflation and interest rates, precisely the concerns that in recent days have stoked investor fears and stock market volatility, which continued Thursday with a second 1,000-point drop in the Dow this week.
The budget deal also means that the United States probably would be returning to trillion-dollar annual deficits next year — much sooner than expected and under a government controlled by Republicans who traditionally had identified themselves as the party of fiscal probity.
When Trump took office about a year ago, the Congressional Budget Office projected that the nation’s deficit would run between $500 billion and $700 billion annually for a few years, not breaching $1 trillion until 2022.
With lower tax revenues expected and now additional spending and an accompanying agreement to lift the debt ceiling, some experts reckon the deficit would blow past $1 trillion in fiscal 2019 and keep rising.
“This deal shows we’re in a permanent era of trilliondollar deficits,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a nonpartisan advocacy group. While spending caps were lifted by about $150 billion each for this year and next, Goldwein says it’s almost certain that the higher limits will become the new baseline.
“There’s no way Congress is going to let spending to fall $150 billion in appropriations,” he said.
Treasury Secretary Steven Mnuchin has said that the president is concerned about the increasing debt. And on Thursday, deputy press secretary Raj Shah said the budget the White House plans to release Monday will show a “path” toward declining deficits. “Economic growth is essential to cutting deficits,” he said. “We are committed to fiscal discipline.”
The U.S. debt held by the public, including foreign investors, is currently about $15 trillion.
“We’ve already entered a period where we have these structural deficits, and to answer that with a new round of tax cuts that are unpaid for, and a new round of spending that’s unpaid for, is just adding insult to injury,” said Michael Peterson, president and chief executive of the Peter G. Peterson Foundation, a non-partisan organization focused on the country’s fiscal challenges.
While members of both parties seemed to largely shrug at the huge spending increase, some Republican lawmakers balked at the budget deal. House Speaker Paul Ryan noted the ramped-up spending for the military that his GOP members sought.
About $165 billion of the spending would go to the Pentagon in the two-year deal and about $130 billion to non-defense programs.
The 2011 spending caps were meant to impose fiscal restraint on Washington. The Great Recession severely shrank government revenues, and spending surged in 2009 as President Obama and Congress responded with a huge economic stimulus package.
The American Recovery and Reinvestment Act was a combination of tax cuts and government spending that totaled roughly $800 billion, most of which took effect in 2009 and 2010.
The federal deficit spiked to $1.5 trillion in 2009 and remained above $1 trillion for the next three years, then went back down to an average of around $575 billion a year in Obama’s second term through 2016, representing a little over the 3 percent share of GDP that economists consider a maximum sustainable rate.
The Republican tax cuts and new budget package amount to a similarly massive fiscal stimulus, but it is coming at a time when the economy is not faltering.
The stimulus may give U.S. growth an extra shortterm boost, but analysts warn it could end up being too much of a good thing. Jason Fruman, Obama’s former economic adviser, tweeted that “deliberately sending an essentially full employment economy into deficits of 5 to 7 percent of GDP is nuts.”