Although the tax and spending suggestions in President Trump’s new budget have received most of the attention, the unrealistic nature of his projections on economic growth must be kept in mind as Congress begins working on plans for Fiscal 2020.
As The Concord Coalition pointed out when the White House released its budget, the plan is based on economic growth assumptions that are “considerably higher than most other forecasts, with the administration projecting inflation-adjusted GDP growth at 3 percent or above through 2024.” That figure drops to 2.9 percent in 2025 and to 2.8 percent for the four years after that.
Such high growth projections enable the administration to assume large gains in federal revenue and less demand for federal assistance programs. This would mean smaller deficits over the next decade than would otherwise be the case.
If the other forecasts are more on target, however, it means that the large deficits that Trump is already projecting for the coming years will be even larger than advertised.
Of particular interest are the recent economic growth projections by the Congressional Budget Office (CBO), which serves as Washington’s official nonpartisan scorekeeper on fiscal policies and proposals. It presents a far less encouraging picture than the administration does.
The budget office projects that growth will slow from 3.1 percent in 2018 to 2.3 percent in the current year, to 1.7 percent in 2020 through 2023, and then average 1.8 percent through the rest of the decade.
While some of this projected slowdown is based on the diminishing effects of the 2017 tax-cut legislation, the primary factors are the aging population -- leading to slower labor force growth -- and lagging labor productivity.
Comparing the economic growth projections by CBO and the White House, Howard Gleckman of the Tax Policy Center sees “a tale of two economies.”
On average, he notes, the budget office projects that the economy will grow about a full percentage point more slowly over the next decade than the administration anticipates.
“That difference adds up,” Gleckman points out. “Cumulatively, Trump predicts the economy will produce $307 trillion in goods and services over the next decade. By contrast, CBO estimates GDP will total $284 trillion . . . "
While economic forecasting is difficult work, the large differences between the administration’s projections and most others is cause for concern -- and deep skepticism about Trump’s entire budget plan.
As Gleckman puts it: “Rosy White House economic scenarios hardly are new. But the gap between this one and more mainstream forecasts is uncommonly wide.”
It should also be noted that neither CBO nor the White House is attempting to predict when the next recession will occur. At some point, however, there will be one. Many analysts expect it within the next two or three years, in part because the current period of economic growth is already a lengthy one by historical standards.
Whenever the next recession occurs, however, there will be further upward pressure on federal deficits -- and the fact that they are already so high could hinder the willingness of policymakers to take appropriate measures to bolster an ailing economy.
The case for the administration’s projections might be more credible if some of its current policies were not actually undermining growth. But trade fights have hurt the economy, dubious immigration policies have exacerbated labor shortages, and the 2017 tax legislation has fallen short of its promised benefits.
The administration and Congress must be realistic in their expectations for economic growth while focusing on measures such as labor force growth, productivity, entitlement reform, infrastructure improvements, more efficient tax policies and cost-saving improvements in the delivery of health care services. In addition, elected officials must shift the federal budget onto a sustainable path.
Such measures can lay the foundations for solid long-term economic growth, and that growth could help the country deal with its fiscal and demographic challenges.
Update: The administration's details underlying its economic and budget forecasts were released today.