Politics Trump Deficit Forecast Is Built on Shaky Assumptions, Experts Say

06:35  11 february  2020
06:35  11 february  2020 Source:   online.wsj.com

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Donald Trump wearing a suit and tie holding a umbrella© Alex Brandon/Associated Press

WASHINGTON—The Trump administration’s proposed budget projects federal deficits would be cut in half as a share of the economy by 2024, and in half again by 2029. While White House officials say they are serious about fulfilling President Trump’s promise to reduce swelling deficits, budget experts say the projections are built on questionable assumptions.

The $4.8 trillion budget for fiscal 2021, released Monday, assumes that economic growth will be stronger than most forecasters project. To hit its targets, the budget excludes tax cuts the administration may propose later and includes spending cuts that are vague, unlikely to advance in Congress, or both.

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That projection relies on rosy assumptions about growth and the accumulation of new federal debt Past administrations have also dressed up their budget forecasts with economic projections that The senior administration official also said that a General Motors strike, aerospace giant Boeing’s

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“A lot of specific policies are meaningful, but the overall numbers are largely phony,” said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, a group that favors deficit reduction.

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White House budget officials and allies say the proposal demonstrates a commitment to tackling the budget gap next year, and that it was right to focus first on policies, such as cutting taxes and regulation, that they say have boosted growth.

“We are in a stronger position to face down the deficit and address spending, which is the real driver of our debt,” said Kevin Brady (R., Texas), the top Republican of the House Ways and Means Committee.

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Altogether, the plan would increase military spending 0.3%, to $740.5 billion for fiscal year 2021, which begins Oct. 1, and it would lower nondefense spending by 5% to $590 billion.

Democrats warned Monday about the potential harm to families and communities that rely on federal programs, and said the Trump tax cuts boosted the deficit.

The major elements of the budget plan are unlikely to become law, as Democrats control the House and spending bills in the Republican-led Senate need bipartisan support.

The White House budget amounts to a fiscal blueprint for the start of a potential second term for Mr. Trump, and it will likely serve as a foundation for his campaign messaging. In 2016, Mr. Trump pledged to eliminate the debt in eight years. Instead, due to tax cuts and spending increases he signed into law, he has presided over a surge in red ink.

For the next decade, the administration projects $50.7 trillion in federal revenue. That is 7% more than a Congressional Budget Office forecast, which assumes that tax cuts passed in 2017 will expire in 2025, as planned, boosting revenue. The administration proposal assumes that those tax cuts instead will be extended.

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The Washington Post said the budget acknowledged that Trump ’s tax cut and his spending increases “are putting severe pressure on the government’s debt.” It’s true that if those proposed “savings” are not enacted, future deficits would be even larger than projected in the Trump budget document.

The Trump administration budget plan generates those figures by assuming real annual gross domestic product will rise 3.1% in 2020—comparing the fourth quarter to the fourth quarter of 2019—if its proposals are enacted. It sees growth dipping slightly to 3% in 2021 and staying near there through the end of the next decade.

Independent forecasters aren’t as optimistic. Federal Reserve officials in December projected GDP growth of 2% in 2020 and 1.9% in 2021, where officials see it settling over the long term. The CBO last month said it expects GDP to rise 2.2% this year and 1.8% in 2021.

Absent these growth assumptions, debt under Mr. Trump’s budget would be $4.5 trillion higher in 2030, and would rise to roughly 89% as a share of economic output, rather than falling to 66% as the administration projects, according to estimates from the Committee for a Responsible Federal Budget.

“It’s wonderful to aspire to 3% permanent growth but basing a long-term budget on that expectation is dangerous,” said Brian Riedl, senior fellow at the conservative Manhattan Institute. “We shouldn’t assume an economic growth rate that the vast majority of economists do not consider realistic.”

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And while the budget includes one round of tax cuts, it ignores two other potential cuts. By leaving those out, the administration makes revenue look higher, budget experts say.

The budget includes tax cuts for individuals and estates that lapse at the end of 2025. If Congress doesn’t act, tax rates will increase, the child tax credit will shrink and the other cuts created in the 2017 tax law would get reversed. The $1.4 trillion cost of those extensions through 2030 is part of the proposed budget.

Two other potential tax changes aren’t included. One is “Tax Cuts 2.0,” the Trump administration’s second-term tax agenda, which it plans to release later this year. That could include a middle-class tax cut, and it doesn’t have a price tag.

The second omission is a smattering of tax increases that are scheduled to take effect over the next few years: alcohol tax increases, tighter limits on interest and research deductions, slower equipment depreciation and higher taxes on international profits.

Allowing those increases to occur could run counter to the administration’s policy goals of encouraging business investment, and companies are already starting to prod Congress to prevent the policies from going into effect.

The cost of extending those tax cuts would be $700 billion by 2030, according to a rough estimate by Kyle Pomerleau of the American Enterprise Institute. That alone would make deficits 12% higher than the administration forecasts.

“It seems like the White House is probably leaving out policies they support in order to help the long-term numbers look smaller,” said Mr. Riedl. “That’s not something novel to this president.”

Write to Richard Rubin at richard.rubin@wsj.com and Kate Davidson at kate.davidson@wsj.com

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