The Congressional Budget Office (CBO) last week published its official analysis of the president’s budget. When initially released, that budget purported to, among other things: balance within ten years, reduce the national debt relative to the size of the economy, and unleash real economic growth rates of 3 percent. The new CBO analysis casts doubt on these assertions.
CBO projects that under President Trump’s 10-year budget, the national debt as a percentage of gross domestic product (GDP) would rise from 77 percent today to 80 percent by 2027. That’s a full third higher than the 60 percent claimed by the president’s Office of Management and Budget.
By 2027, at the end of the 10-year budget window, deficits would equal 2.6 percent of GDP – an improvement on CBO’s projected baseline deficit for that year (5.2 percent), but very far from the promised balanced budget.
Much of the divergence between CBO’s estimates and the administration’s estimates stems from the difference in economic projections. CBO projects that under the president’s budget the economy would grow at an average annual rate of 1.9 percent, adjusted for inflation, over the next 10 years. That estimated growth rate would be just 0.1 percent higher than the CBO baseline. In contrast, the administration estimates that annual economic growth under the president’s policies would reach of 3 percent from 2021 through 2027.
The difference in economic projections has a substantial impact on revenue projections. According to CBO, revenues would be $3.6 trillion lower than what the administration projects over the next 10 years, most of which ($3.4 trillion) is due to differing economic projections.
In assessing the the economic impact of individual proposals in the president’s budget, CBO was constrained by the lack of details provided by the administration. As stated in the CBO report:
Each year, CBO typically issues a quantitative analysis of the macroeconomic effects of the President’s policy proposals and the resulting feedback effects on the budget. However, CBO cannot provide a comprehensive analysis of the effects of the proposed policies in the President’s budget for fiscal year 2018 because many of them did not contain the details necessary to assess those effects.
Thus, while the administration claims a huge economic boost from its budget proposals, CBO only had enough information to “score” the overall economic effect of the budget’s 10-year deficit reduction. That effect, according to CBO, would result in additional deficit reduction of $160 billion over 10 years.
As for the conventional budget scoring of individual proposals, which does not include macroeconomic effects, CBO generally gave the administration the benefit of the doubt despite the lack of details, saying:
The proposals made by the Administration this year are in many cases not sufficiently specified for CBO and JCT [the Joint Committee on Taxation] to make their own estimates of their effects on the budget. For some of those proposals -- such as the two largest health care proposals, as well as those related to tax reform, infrastructure, and the Postal Service -- CBO and JCT included the Administration’s estimates as a placeholder because the agencies judged those estimates to be achievable targets for the budgetary effects of detailed policies that might be proposed in the future.
In some instances, notably tax reform and health care, CBO’s acceptance of the administration’s estimates could well turn out to be a best-case scenario.
For example, CBO assumed that the president’s tax reform proposals would be deficit-neutral, in keeping with a set of principles outlined by the administration. However, Trump’s tax proposals have been estimated by others to reduce revenues by $3 trillion to $7 trillion over 10 years based on the few details released. If that were all added to the existing deficits under the Trump budget, it could very likely result in a 10-year deficit greater than under current law.
On health care, CBO accepted the administration’s estimate of the net effect of legislation to repeal and replace the Affordable Care Act (ACA). The spending reduction portion of this estimate ($1.25 trillion) appears to include a substantial Medicaid cut relative to current law. Yet the administration also included an additional $610 billion Medicaid reduction without specifying how that would achieved. CBO generously “interpreted the Administration’s estimate as indicating a target for the budgetary effects of the detailed policies that might be proposed in the future.”
CBO also projects that the president’s proposals would bring discretionary spending (appropriations) to historically low levels as a share of the economy, from 6.2 percent of GDP in 2018 to 4.1 percent by 2027. To put this reduction in context, CBO notes that discretionary spending has never fallen below 6 percent of GDP since that number was first tracked in 1962 and has averaged 8.6 percent of GDP over that time.
Defense spending would continue to fall as a percentage of GDP from today’s levels despite President Trump’s claimed support for a more muscular defense structure. Base-level defense (not including war spending) would fall from 2.9 percent of GDP in 2017 to 2.5 percent in 2027. That would be just slightly higher than CBO’s baseline projection (2.4 percent of GDP).
More implausible is that nondefense discretionary spending -- which includes critical investments in our future, such as scientific research -- would fall to just 1.6 percent of GDP. That would not just be below the lowest level it’s been since World War II; it would be roughly half of the lowest level.
The CBO’s analysis of the president’s budget is instructive because it demonstrates how dependent that budget is on an assumed economic boost from policies that are too vague to assess. Viewed through conventional scoring methods, and even after giving the administration the benefit of the doubt on the budgetary effect of key proposals, debt as a share of GDP in the Trump budget ends up slightly higher in 10 years than CBO’s score of President Obama’s last budget (80 percent of GDP for Trump and 77 percent for Obama).
As the budget process plays out over the coming months, the Trump administration should fill in crucial details of its proposals, particularly on tax and health care reform, so that policymakers on Capitol Hill and the public can have a clearer sense of how it intends to make good on its promised goals. The administration should also rethink its rosy economic scenario, which far exceeds consensus projections from non-administration sources.