Budget Rhetoric Brings Heat But No Light

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The Treasury Department’s final report for Fiscal Year 2018, showing a 17 percent ($113 billion) jump in the deficit, has drawn new attention to the nation’s worsening fiscal position and injected the issue into the midterm congressional campaigns.

The sobering report has not, however, brought about a more rational or realistic discussion on solutions.

Republicans, predictably, claim the numbers show that the entire problem is on the spending side. The solution, they say, is to cut the growing cost of major entitlement programs such as Social Security, Medicare and Medicaid.

Democrats, predictably, claim the problem is caused by Republican tax cuts. The solution, they say, is to reverse some or all of those tax cuts and protect the entitlement programs.

Both sides have it half right. The major entitlement programs do pose a serious fiscal challenge, and tax cuts do make the deficit worse.

On the spending side, it is clear that Social Security, Medicare and Medicaid are driving federal spending higher each year as the population ages and the per-beneficiary cost of providing health care rises. Together, these three programs accounted for roughly two-thirds of non-interest spending growth in 2018 and that general trend is projected to continue for the indefinite future.

According to long-term budget projections by the the Congressional Budget Office (CBO), Social Security and the major health care programs will grow in cost from 10.1 percent of the economy in 2018 to 15.5 percent in 2048. To put that in the context of today’s budget, adding an extra 5.4 percent of the economy would boost federal spending by more than $1 trillion.

Tax cuts did not cause this problem. It’s a matter of automatic cost growth and it threatens to crowd out all other spending priorities as more and more tax dollars every year are consumed by just these programs.

The need for entitlement reform is not, therefore, merely a partisan talking point. It is a very real problem of resource allocation.

Moreover, in the case of Social Security and the Medicare Hospital Insurance Fund (HI), promised benefits cannot be fully paid beyond the exhaustion dates of the respective trust funds. The programs’ trustees now estimate these dates as 2034 for Social Security and 2026 for Medicare HI. Again, this looming crisis has nothing to do with tax cuts.

But while tax cuts did not give rise to the need for entitlement reform, they did make a deep fiscal ditch even deeper.

Republicans have cited the $14 billion revenue increase from 2017 to 2018 as proof that the tax cuts did not lose revenues. This is a disingenuous argument. Revenue routinely goes up from year to year, particularly in a strong economy, and it usually does so by a far greater extent than the 0.4 percent increase in 2018. For example, revenue grew by 1.5 percent in Fiscal Year 2017 even though the economy was not growing as fast as it did in 2018.  

Consider that in June 2017, CBO’s baseline for Fiscal Year 2018 projected that federal revenues would total $3.5 trillion. After the tax cuts were passed, CBO lowered its 2018 revenue projection to $3.3 trillion, which turned out to be right on target. Total 2018 revenue, as shown in last week’s Treasury report, was $3.328 trillion.

Revenue in every major category was lower in 2018 than pre-tax cut projections, with the largest plunge coming in corporate income taxes — a main component of the rate reductions.

Nothing in the year-end numbers indicates that the tax cuts will pay for themselves. On the contrary, they confirm that the tax cuts will produce less revenue than would otherwise have been the case and that deficits will be higher. CBO estimates that even with positive economic feedback the tax cuts will reduce revenue from prior projections by $1.3 trillion over 10 years.

Despite the pre-election spin from party leaders, the rest of us should not be distracted from an obvious truth: Any meaningful action to keep annual deficits and total debt from rising to unsustainable levels will need to involve both entitlement spending and revenues. Until this basic political reality is accepted, we are destined to remain in a perilous game of fiscal “chicken.”

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