Presidential budgets are designed to highlight an administration’s budgetary priorities, how they would affect the economy and how it all adds up. Budgets should be as transparent as possible so that members of Congress, the public and the media can understand what the president is proposing. While presidential budgets are advisory, they should stand as a benchmark of accountability for whether the administration’s assumptions and proposals are credible.
The budget released on Monday, February 10 by the Trump administration does not live up to that standard. Its overall mix of optimistic assumptions, scoring gimmicks, and opaque proposals serve to limit accountability, minimize the magnitude of our fiscal challenges, and overstate the likely effectiveness of the president’s proposals in dealing with those challenges. That problematic mix also serves to taint even the sound proposals in the budget as well as the fiscally responsible top-line budget path it lays out.
Taken at face value, the president’s budget looks fiscally responsible. It would substantially reduce deficits from $1.1 trillion in 2020 (4.9 percent of GDP) to $261 billion (0.7 percent of GDP) in 2030. Over that time, debt held by the public would drop from 80.5 percent of GDP to 66.1 percent of GDP. This is the result of proposals that would reduce deficits by a purported $4.6 trillion over the 2021-2030 period. Revenues would rise from 16.7 percent of GDP in 2020 to 17.6 percent in 2030 and outlays would fall from 21.6 percent of GDP in 2020 to 18.4 percent in 2030.
Beneath the surface, however, these seemingly positive assumptions lack credibility.
The numbers in the president’s budget, including the economic assumptions, assume enactment of the president’s proposals. It is thus important for the administration to make a good faith effort to model its expectations for the economy and how its proposals would impact the economy. This is what allows the Congress to evaluate the administration’s intentions and sets expectations as Congress uses the proposal to inform its budget process. It also provides transparency for voters and economic analysts to assess the budget proposals.
There is a long history, through many administrations of both parties, of assuming economic growth on the high side of CBO and private sector assumptions. This is understandable because presumably every administration will project that its proposals would have a positive impact on the economy.
However, this administration has taken such “rosy scenarios” to new heights. In fact, the rosy scenario itself is the biggest “proposal” in the Trump budget, in that its deficit impact is twice what any other proposal achieves.
According to calculations by the Tax Policy Center, simply substituting CBO economic assumptions into the rest of the administration’s budget would lead to nearly $4 trillion in higher deficits over the 10-year budget timeframe. For perspective, the next biggest deficit reduction item in the budget is the administration’s cut to discretionary spending (discussed below) which reduces the 10-year deficit by nearly $2 trillion.
The administration projects real (inflation-adjusted) growth of 3.0 or above every year through 2025. The CBO, Federal Reserve and Blue Chip forecasts all project 2.0 percent or lower economic growth for the same time period. The administration then projects growth no lower than 2.8 percent over the rest of the budget window. The CBO projects growth averaging 1.7 percent of GDP over the rest of the window.
Also, this assumed annual growth is higher than any annual growth the administration has seen since it took office. Growth in 2017 was 2.4; 2018 was 2.9; 2019 was 2.3 percent. This was despite the administration’s tax cuts, spending increases, and large deficits providing stimulus.
The unrealistic growth assumptions can be seen even from comparing the last two presidential budget submissions. In the budget submitted in 2018, the OMB projected growth in 2019 to be 3.2 percent. The 2019 submission again projected 3.2 percent growth for the year. In actuality, growth in 2019 was 2.3 percent. This is about as large a miss for an economic projection as you can have for such a short time period without a major change such as a recession.
Even small differences in economic assumptions produce major budgetary changes. CBO suggests that every 0.1-0.2 percent increase in economic growth leads to just over $300 billion in deficit reduction. An average of a 0.5 percent increase in assumed annual growth over 10 years leads to an extra $1.3 trillion in deficit reduction. That is why these differences in projections are not just simple differences between economists. They make a huge difference in deficit projections and mask the reality of our deficit challenge through the entirety of the budget window.
In the administration’s budget, for example, the rosy economic growth assumptions produce so much added revenue that the projected 10-year total exceeds the CBO baseline by nearly $3 trillion even though the CBO baseline assumes that various tax cuts enacted in 2017 will expire over the next 10 years (see below). In other words, the budget assumes that lower taxes will lead to about $3 trillion more in revenues.
The lack of transparency, and accountability in the president’s budget can next be found in its treatment of certain tax cuts enacted in 2017 and scheduled to expire after 2025. The president would like to make these tax cuts permanent, which would require legislation from Congress. According to OMB, the revenue loss and associated spending increase from such legislation would be $1.37 trillion from 2025 through 2030. The administration hides this cost by assuming it into the baseline where it essentially disappears.
The OMB justifies this sleight-of-hand by arguing that “current law includes a number of scheduled tax changes that the administration believes are unlikely to occur and that prevent it from serving as a realistic benchmark for judging the effect of new legislation.” The adjusted baseline, “is intended to be more realistic by assuming permanent extension of those expiring provisions.”
While it is perfectly legitimate for the president to propose extending these tax cuts, the budgetary effect of doing so should be clearly shown as a policy proposal and not an assumption. If it were shown as a policy proposal, the president would either have to show “pay-as-you-go” offsets to avoid an increase in the deficit or accept responsibility for not bothering with offsets. Simply assuming tax cut extensions into the baseline allows the president to avoid this unpleasant hard choice.
This might be acceptable if the president had it within his executive authority to extend the tax cuts on his own, but because it will require legislation to carry out the president’s desired outcome it should be included, along with the estimated revenue loss or offsets, with all of his other policy proposals. The fact that the administration thinks it “unlikely” that the tax cuts won’t be extended is beside the point. It is unlikely that a football team will miss an extra point but they still have to go through with the play.
The bottom line is that the tax cuts will expire without new legislation and the substantial cost of that legislation should be transparently shown as a cost of the president’s proposals so that Congress and the public can evaluate the trade-offs between tax cut extensions versus other potential priorities.
The health care proposals are also problematic. The budget includes about $844 billion in savings as a placeholder attributed to “the President’s health reform vision.” Yet, that vision is nowhere to be found in the budget documents (or outside of them). By including a large amount of savings from a non-existent proposal, the administration is simply obfuscating and avoiding accountability.
This is especially true within the context of the administration’s current arguments in court to repeal the entire Affordable Care Act. Success in court would bring a need to rapidly implement or enact a new “vision” for the health care system, and this budget contemplates a vision less expensive than the current system. The administration owes Congress and the voters the details of that vision, yet those are absent. This allows the administration to take credit for savings but avoid accountability for the hard choices needed to bring about those savings.
What might those hard choices be? The Center on Budget and Policy Priorities estimates that “By 2030, the annual cuts to Medicaid and the ACA would be almost as large as the cuts that would result from simply eliminating the ACA’s Medicaid expansion and its premium tax credits…[which] would cause 20 million people to lose coverage.”
The proposals in the budget for Medicaid (beyond the changes included in the “vision”) would end the federal financing arrangement behind the ACA’s Medicaid expansion. Savings from this are very uncertain. The administration claims $152 billion in savings from creating work requirements for Medicaid benefits, which they call a “community engagement requirement.” Yet, these work requirements for Medicaid are currently being struck down by the courts and some states that had plans to enact such requirements are backing down. If the court cases continue to go against the Administration, the proposal might not save any money, and given how long the legal battle might drag out, the savings amount from the proposal is likely to be inflated.
The transparency and accountability problems even infect the Medicare savings proposals, which are largely bi-partisan ideas proposed by both the Trump and Obama administrations in prior budgets. While the proposals are responsible and would save nearly $480 billion, they are overshadowed by the obfuscation inherent in the other health care proposals and are tainted by the catch-all explanation given for them — that they are proposals to rid Medicare of “waste, fraud, and abuse.” By playing up to the idea that we can get large budgetary savings by simply eliminating waste, fraud, and abuse, they make responsible budgeting more difficult generally, and hide the seriousness of these proposals specifically.
It is not unusual for presidential budgets to show big savings in the outyears, but the Fiscal Year 2021 budget is particularly aggressive in this regard. Of the $4.6 trillion in purported savings, only 23 percent would come in the first five years, covering a potential second term for President Trump. The remaining 77 percent comes in the second five years of the 10-year outlook when President Trump would no longer be in office.
A major factor in this lopsided deficit reduction comes from the administration’s proposed path for discretionary spending, the portion of the budget that goes through the annual appropriations process.
The budget’s largest line-item saving ($1.5 trillion) comes from mostly unspecified cuts in non-defense appropriations which make up roughly 15 percent of the budget and are already projected to shrink relative to the economy. Under the president’s budget, this category would fall from today’s level of about 3 percent of GDP to 1.6 percent. For context, spending on non-defense appropriations has averaged 3.8 percent of GDP over the past 50 years.
Nothing in recent experience would suggest that cuts of this magnitude are anywhere near likely to be enacted. In fact, the administration agreed to a budget deal last year that raised spending on appropriations even though it now proposes to reverse those very increases. Such remarkable inconsistency only serves to highlight how dubious the claimed savings are from future appropriations.
The defense discretionary numbers in the president’s budget are more plausible, but still seem to understate likely results. Defense spending was 3.2 percent of GDP in 2019 and that level is projected to remain constant in 2020. The budget would keep defense spending at 3.2 percent of GDP in 2021, but assumes that it would then shrink in each successive year reaching an historically low 2.2 percent of GDP in 2030.
One factor in this is the administration’s assumption that overseas contingency operations funding (OCO), which is not subject to budget caps and is supposed to go for ongoing military operations, will be merged into the rest of the defense budget (i.e. base funding). As that happens, annual OCO funding is assumed to decline from $69 billion in 2021 to $20 billion in 2022 and $10 billion by 2024-2030. Whether or not that is a realistic projection depends on whether military operations will substantially decline or remain roughly where they are now. If they remain constant, then the budget is likely to understate defense spending by hundreds of billions of dollars
Another factor, that is much more of a blatant gimmick, is the budget’s assumption that there will be a freeze in new budget authority for defense spending after 2025. Obviously, this assumption has no policy rationale or basis in reality. But the assumption of a freeze produces undue savings that should not be taken seriously.
Presidential budgets are prone to paint a very optimistic future. For the most part, that’s fair game because we should not expect a president to propose a budget that would show things getting worse. Allowing leeway for optimism, however, is not a license for the president to produce a highly improbable range of economic and policy assumptions. The Committee for a Responsible Federal Budget estimates that by using CBO assumptions and estimates instead of OMB’s, debt would likely rise to between 90 and 96 percent of GDP by 2030 rather than 66 percent as claimed in the budget.
The magnitude of gimmickry contained in President Trump’s FY 2021 budget fails to produce a credible path forward and merely serves to avoid responsibility for the more realistic (and problematic) outcomes likely to result.