President Donald Trump’s newly released budget proposal for fiscal year 2027 sounds so much like those I’ve heard from presidents my entire life. Pick some rosy assumption about how the economy will grow, and everything will seem just fine.
Nothing new here, but nothing reassuring either.
In this case, the president assumes a 3% annual growth in the economy over the next decade.
Such assumptions rarely, if ever, come true, while the overspending continues to rack up record levels of national debt.
Congress rules
The Constitution puts Congress in the driver’s seat when it comes to federal revenue and spending. Presidents merely make requests that express policy priorities. This budget covers only about one-third of federal spending, focusing mainly on discretionary outlays.
Even so, the frustrating thing is that those requests never seem to focus on real spending reductions.
As Dominik Lett of the libertarian-leaning Cato Institute said, the president’s budget doesn’t say a word about Social Security, Medicare or the rising interest due annually on the national debt.
“With deficits at nearly $2 trillion and publicly held federal debt set to exceed the nation’s entire economic output this year, Congress desperately needs fiscal responsibility,” Lett wrote. “And to arrest the long-term growth of the debt and deficit, Congress needs to adopt meaningful budget targets and establish an empowered independent fiscal commission to address the growth of old-age retirement and health care programs.”
Good luck with that.
Huge military budget
The centerpiece of Trump’s budget request is $1.5 trillion for defense. As Reason.com reported, that’s about a 42% increase. Lett calls this “fiscally reckless and militarily unnecessary.” On the other side of the ledger are cuts to non-defense items, including a move toward privatizing the TSA and making states responsible for funding their own disaster relief.
But these cuts wouldn’t come close to offsetting the increases.
The Committee for a Responsible Federal Budget, a private nonprofit group, estimates that the extra military spending would add $6.9 trillion to the national debt over the next 10 years. It may seem necessary, depending on how many more Venezuelan and Iranian-type military operations the president has in mind, but a mounting debt may limit those adventures in ways no politician can control.
None of these concerns is new, of course. In April 1982, the L.A. Times warned that budget deficits under President Reagan might sink the U.S. economy. A copy of a story I obtained through newspapers.com said the president had presented rosy estimates of the budget’s impact on deficits based on unrealistic assumptions about economic growth.
For context, the Congressional Budget Office estimated the deficit that year might exceed $120 billion. This year’s shortfall may exceed $2 trillion.
Crying wolf?
But decades of overspending and warnings (with the exception of a few years in the late 1990s) may be part of the problem. Those warnings, so far, have not come true.
Which, of course, doesn’t mean they can’t at some future point.
Also, Americans may think Washington has to balance the budget immediately in order to avoid disaster. Federal Reserve Chairman Jerome Powell has said that is unnecessary.
Speaking to an economics class at Harvard last month, Powell said the nation’s debt problem isn’t a crisis yet. It will be, however, if the current trajectory doesn’t change, according to a story published by Yahoo.com.
“We don’t have to pay the debt down,” he said. “We just need to have primary balance and begin to have the economy actually growing more quickly than the debt.”
Right now, the debt, currently about $39 trillion, is growing faster than the nation’s economy. That growth increases the annual cost of paying interest on the debt, which can lead to higher interest rates in the general economy (think credit cards, car loans and mortgages) and the possibility of inflation.
The United States borrows money by issuing Treasury bonds, bills, notes, floating rate notes and Treasury inflation-protected securities. Investors and other countries purchase these investment options because, although they pay little in interest, they are considered safe and secure investments. The dollar is the world’s reserve currency, meaning it is the principal currency for worldwide trade.
None of these things should be taken for granted. Investors may demand higher returns if they feel the nation is losing control over its debt problem. That may initiate a downward spiral that’s difficult to reverse.
As I said, this is a problem for Congress to solve, independent of whatever the president is suggesting. Let’s hope they can at least, as Powell wisely suggested, keep the growth of the nation’s overspending at a manageable level while keeping growth projections realistic. Our futures depend on it.