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Monday, December 09, 2019 {{ new Date().getDay() }}

Reprinted with permission from DCReport.

 

The headline above is not partisan hyperbole or a rhetorical flourish: The $1 trillion-plus annual Trump budget deficits that are about to start will soon create huge policy challenges for future generations of Americans.

While presidents submit and Congress adopts one-year budgets (when they bother to do a budget at all, that is), the spending and taxing policies put in place in those budgets are more or less permanent.

This is certainly true with federal spending because most of it is “mandatory”‘ and will continue until Congress and the president change it. Given that most mandatory spending (Social Security, Medicare and many veterans benefits, for example) are growing in popularity, reductions aren’t likely any time soon…and maybe not at all.

A second category of mandatory spending — interest on the debt — is only going to increase as interest rates rise from their recent lows and the national debt increases precipitously.

But mandatory spending (which, depending on whose numbers you use, is between two-thirds and three-quarters of that side of the budget) isn’t the only federal spending that’s ongoing. Everything else may officially be classified as “discretionary” and require an annual appropriation to be spent, but Congress and the president seldom make more than incremental reductions in some of these programs. Overall, this spending goes up continuously.

If anything, the Trump deficits will be larger than estimated.

The permanent nature of the federal budget is also true with revenues. The tax code essentially operates as mandatory spending because most of it continues until a change is enacted. Even when some provisions are set to expire (such as the individual tax cuts included in last year’s bill in 2025), the expectation is that, like annual appropriations, they will be extended.

All of this means that we’re not going to grow out of this. Unlike the trillion-dollar deficits in the early years of the Obama administration that occurred because of an economic downturn (you still remember the Great Recession, right?) and temporary tax reductions and spending increases, the Trump deficits are the result of permanent changes in taxes and spending when the economy is doing well.

If anything, the Trump deficits will be larger rather than smaller than estimated as (1) the U.S. economy worsens, (2) there are military or natural disasters that require federal involvement and (3) additional spending and tax breaks are adopted. An annual budget deficit and national debt increase of $2 trillion is very possible.

This underlying budget situation — permanent trillion-dollar-plus deficits every year of the Trump administration and beyond — will force U.S. politics and politicians to face challenges that they’ve never had to face before. Consider just these five.

  1. How will the federal government respond to the next economic downturn? Will Americans, who throughout U.S. history have expressed great anger about Washington’s red ink, decide that a deficit that approaches or exceeds $2 trillion is acceptable? Will policymakers have to limit their response to a downturn to show obeisance to the old limit-or-reduce-the-deficit mantra as they did in 2009 when the Obama stimulus was developed? Does this mean that the next economic downturn will be deeper and last longer than we’ve come to expect?
  2. Is the same thing true of future military contingencies? How will the U.S. respond if there’s less tolerance for even higher deficits?
  3. What will the need to finance a national debt that’s increasing by $1 trillion or more each year do to interest rates in the United States? How vulnerable will that make the American economy to the big foreign lenders like the Chinese?
  4. How will the U.S. be able to respond to the needs of the next generations of Americans such as infrastructure, retirement and healthcare?
  5. How will Congress ever agree to another budget if voting for deficits that are less than $1 trillion is politically unpalatable? Are threatened or actual government shutdowns even more likely now than they’ve been recently?

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