President Donald Trump’s budget deal raises the U.S. government’s debt ceiling and spending caps. Trump and House Speaker Nancy Pelosi have been the architects. The deal has also been supported by key congressional leaders.
The bipartisan budget proposal, which is headed to Trump’s desk after passing the U.S. House on July 7 and gaining Senate approval last week, raises federal spending by $320 billion in 2020 and increases the debt ceiling through July 2021, after the next presidential election.
The plan passed into law will increase the annual deficit and long-term federal debt. Including the new legislation, $4 trillion has been added on Trump’s watch, according to an analysis prepared by Forbes Magazine contributor Chuck Jones in July.
To add some perspective: In 2013, the Bipartisan Budget Act raised spending by $62 billion. In 2015, federal spending increased by $80 billion. In 2018, the increase hit $300 billion. Some deficit and debt watchers say this two-year budget may be the worst budget deal ever and represents a bipartisan “abdication of responsibility.”
The federal debt is the total amount of money that the U.S. government owes, either to its investors or to itself. Today, our long-term federal debt is a record high $22 trillion — and growing daily. The federal debt as a share of the U.S. economy is the highest it has been since just after World War II.
American leaders of yesteryear knew how to reduce debt. For example, the federal debt has spiked during every war over the past 230 years; however, it was always paid down afterward. After the Civil War, for example, the U.S. government ran surpluses 28 years in a row, causing debt to plunge from 31% of GDP down to 7%.
In the 1990s in Canada, a left-of-center government imposed and sustained significant spending cuts to avert an economic disaster — something that ought to be evaluated as a model for America.
The Canadian story has a favorable ending because elected leaders made tough decisions to reduce spending for defense, business subsidies, farm aid, welfare, grants to lower governments and elimination of some federal jobs, among other austerity measures. The Canadian federal debt as percentage of GDP dropped by half, to 34% by 2006. Defying Keynesian predictions, the large spending cuts revived the economy and launched an economic boom.
Indeed, America has for some time seemed to be marching into a fiscal crisis. The importance of spending, annual deficits and the long-term federal debt must become more central to America’s policy debates.
During the 1990-2000 era, in an economic expansion that spanned the presidencies of Bill Clinton and George W. Bush, the U.S. economy grew by 43% in real terms vs. 24% under Barack Obama and Donald Trump, according to research conducted by the Balance.
While the U.S. jobless rate of 3.7% is lower today, wage growth, productivity growth and workforce participation were all higher back then.
To the extent that political leaders consider annual deficits and long-term federal debt, Washington leaders seem to be ambivalent.
The proposed new budget plan will borrow nearly $2 trillion over the next two years — much of it from foreign countries. According to Maya MacGuineas of the Washington-based Committee for a Responsible Federal Budget (CRFB), this year’s deficit is largely the result of opting to not pay for recent new spending legislation. The main debt contributor, she reports, is the unpaid-for tax cuts along with an unpaid-for increase in discretionary spending caps.
The federal borrowing will likely require: 1) an increase to budgetary spending caps ($358 billion, or an estimated $1.7 trillion during the next decade if extended); 2) repealing the “Cadillac tax” on excessively expensive health insurance plans (a loss of $200 billion over 10 years); 3) reviving zombie “tax extenders” that have been expired for a year and a half ($30 billion); 4) expanding tax credits ($130 billion); and, 5) repealing the cap on the state and local tax deduction ($500 billion through 2025).
One result will mean that taxpayers will spend more on interest on this debt than on the education and welfare of children. Within six years, mounting interest costs will even eclipse U.S. defense spending.
Most of those seeking elective office talk about the good news of tax breaks, infrastructure improvements, job growth and favorable short-term economic indicators but place far less emphasis on the short- and long-term costs.
The federal government does not need to be in the black; however, the U.S. federal debt as a percent of GDP is now 78%, says the Congressional Budget Office, already a dangerously high amount according to CRFB. Public debt at 60% of GDP is an internationally recognized standard and is a sound short-term target. In the future, the United States — long the economic powerhouse of the world — must undertake additional efforts to curb long-term debt to reach the historical debt level of 40% of GDP.
When it comes to increased federal spending, politicians may be underestimating our nation’s ability to understand that real sacrifices, rather than kicking the can down the road, will be necessary sooner rather than later. While awareness may be increasing nominally, a widespread sense of urgency from the public will be required to spur more constructive action in the future.
Chuck Slocum is president of the Williston Group, a management consulting firm. He can be reached at Chuck@WillistonGroup.com.
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