For fiscal junkies, these are the best of times. The GOP-controlled House and Senate passed versions of a $4 trillion Fiscal Year 2018 budget, the United States logged last year the sixth largest budget deficit in history and the stock market reached record highs last week in anticipation of a major corporate tax cut, which the budget makes easier to pass.
In many ways, the fiscal news is like a jig-saw puzzle with pieces that don’t exactly fit together:
- The Senate-passed FY 2018 budget measure leaves federal spending at current levels and provides for a major tax cut, which Republicans concede will increase the federal deficit in the short-term.
- US Treasury announced the federal government finished FY 2017 with a $666 billion budget deficit, $80 billion more than the previous year, as spending grew by 3 percent, but revenues only increased by 1 percent.
- Even though tax legislation hasn’t been finalized, Wall Street became giddy over a congressional budget with a reconciliation process that makes it politically easier to pass a tax cut without any Democratic support. The Dow Jones industrial average on Friday surged more than 165 points to a record 23,328. Shares of JP Morgan Chase hit an all-time high.
Republicans have campaigned for decades on fiscal discipline and shrinking the federal government. The recent news about tax cuts and budget deficits run contrary to that ideology, though House Speaker Paul Ryan assured in a media interview that deficits were still concerning to his political party.
Not concerning enough to blunt the drive to enact a tax cut by the end of the year that no one denies will increase the federal deficit. GOP supporters say tax cuts will stimulate the economy and eventually economic growth will erase the red ink. Democrats disagree, claiming supply-side, trickle-down economics hasn’t produced the bonanza of benefits promised by its supporters, just widened income inequality at the expense of the US middle class.
The FY 2018 budget, which retiring GOP Senator Bob Corker of Tennessee called a “hoax,” seems designed to enact a tax cut, not implement a spending strategy. The tax cut is viewed by GOP leaders – and their wealthier supporters – as must-pass legislation to overshadow congressional failure to repeal Obamacare before the 2018 mid-term elections.
In addition to the impact of a tax cut, there will be pressure on the federal budget over the next year as Congress approves substantial funding to pay for severe hurricane and wildfire relief. Trump administration efforts to undermine Obamacare may have unpredictable negative economic consequences. The prospect of military conflict with North Korea along with accelerated modernization of the US nuclear arsenal also could dramatically push up spending levels.
To counter higher deficits, the FY 2018 budget points to $1.5 trillion in spending cuts on Medicare and Medicaid over the next decade. Higher outlays for Social Security, Medicare, Medicaid and payments on the national debt were blamed for pushing up the deficit last year, which now equals 3.5 percent of US gross domestic product. The national debt now exceeds $20 trillion. The Congressional Budget Office has estimated the national debt will rise to 91 percent of the US economy as early as 2027 absent any fiscal policy changes.
Keeping up with all this US fiscal activity is a little like playing a 3D Sudoku puzzle:
- The House and Senate still need to agree on a final budget, which might come as early as this week if the House decides to accept the Senate version and skip a conference committee to iron out differences.
- President Trump has dangled some tantalizing numbers about his dream tax-cut legislation, but there isn’t an official tax bill to review.
- The budget reconciliation process might make it theoretically easier to pass tax legislation, but only three Senate Republican defections could doom the plan, a la Obamacare repeal. Given Trump’s testy relationships with a number of senators, a political roadblock isn’t inconceivable.
- The budget reconciliation process isn’t a free ride. There are limits on how much the tax cut can raise the deficit, which could stoke a ferocious intra-GOP debate over what taxes cut.
- While Democrats haven’t been consulted so far, they have been courted to support the tax cut. There are a lot of side issues that could come into play in the attempt to earn some level of bipartisan support.
- Ryan has threatened to keep House members in session through Christmas to pass a tax bill. It may not be an idle threat.