Despite Strong Economy, Federal Deficit Soars

Aug 3, 2018
Originally published on August 7, 2018 2:30 pm

On a muggy morning this week, a group of bankers and investment managers met at The Hay-Adams Hotel in Washington, D.C. They got an update from the Treasury Department about government cash flows and, according to minutes of the meeting, the picture wasn't pretty.

Corporate tax receipts are down for the year, while government spending is up. Even with a fast-growing economy, the Treasury Department expects to borrow more than $750 billion to pay its bills during the last six months of this year.

"The federal budget deficit is ballooning, skyrocketing, soaring, whichever way you want to describe it," said longtime fiscal watchdog Stan Collender, who blogs about federal finances as "The Budget Guy."

"You've got a kind of perfect storm here," Collender said. "You've got more spending. You've got less revenue. And the deficit is just getting bigger and bigger, to the point where it will be at least a trillion dollars every year during the Trump administration and beyond."

Even the White House's own rosy forecast acknowledges that the deficit will exceed 5 percent of the overall economy next year — a level it has previously reached only after deep recessions when unemployment topped 10 percent. Today, the economy is near full employment. But the government is still acting like a spendthrift family, piling up credit card bills even though times are good.

"It's close to unprecedented," Collender said. "When the economy is doing well, which it's obviously doing and has done for a decade, you would want a fiscal policy that would get the deficit to go down, not up."

But policymakers in Washington have gone in precisely the opposite direction. Earlier this year, Congress boosted spending on both the military and domestic programs. And then there is the tax cut, which the president bragged about at a campaign rally this week.

"We passed the biggest tax cuts and reform in American history. Biggest cuts in history," Trump told supporters in Tampa, Fla.

In fact, these were not the biggest tax cuts ever, but they are cutting in to government revenues, despite repeated promises that the cuts would pay for themselves.

"Let me be 100 percent clear about one thing: The tax cuts are never going to pay for themselves," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. "They can grow the economy, but not enough to come anywhere close to offsetting the cost of them."

MacGuineas blamed an outbreak of fiscal "free-lunchism" for the growing mountain of government debt.

"If you want to spend more, you have to pay more in taxes," she said. "And if you want to cut taxes, you have to be willing to cut spending also. And right now, it seems to be this period where no politician is willing to do any of those."

Like a family that has maxed out its credit cards, policymakers may have less room to maneuver the next time they're confronted with an actual crisis, as a result of the government's mounting debt load.

"Last time we had a recession, our debt was half the level it is today, relative to the economy," MacGuineas said. "That meant we had a lot of fiscal tools to help respond. But as our debt gets higher, our ability to respond to a recession or another kind of crisis is definitely much more difficult."

The growing deficit also means higher borrowing costs. So far this fiscal year, growth in Social Security, Medicare and defense spending have all been eclipsed by rising interest on the debt.

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NOEL KING, HOST:

All right. This morning, the Labor Department reported another month of strong job growth. Employers added 157,000 jobs in July, and the unemployment rate ticked down to 3.9 percent. And of course, we had news last week that the U.S. economy grew in the second quarter at the fastest pace in nearly four years. But all this positive economic news is not helping the government's finances. The deficit is expected to top a trillion dollars next year. NPR's Scott Horsley has the story.

SCOTT HORSLEY, BYLINE: On a muggy morning earlier this week, a group of bankers and investment managers met at the Hay-Adams Hotel here in Washington. They got an update from the Treasury Department about government cash flows. And according to minutes of the meeting, the picture was not pretty. Corporate tax receipts are down for the year while government spending is up. The Treasury expects to borrow more than $750 billion to pay its bills in the last six months of the year.

STAN COLLENDER: The federal budget deficit is ballooning, skyrocketing, soaring - whichever way you want to describe it.

HORSLEY: Stan Collender writes "The Budget Guy" blog about federal finances.

COLLENDER: You've got a kind of perfect storm here. You've got more spending. You've got less revenue. And the deficit is just getting bigger and bigger, to the point where it will be at least a trillion dollars every year during the Trump administration and beyond.

HORSLEY: Even the White House's own rosy forecast acknowledges the deficit will exceed 5 percent of the overall economy next year, a level it's previously reached only after deep recessions, when unemployment topped 10 percent. Today, the economy is near full employment. But Collender says the government is still acting like a spendthrift family, piling up credit card bills even though times are good.

COLLENDER: It's close to unprecedented. When the economy's doing well, which it's obviously doing and has done for a decade, you would want a fiscal policy that would get the deficit to go down, not up.

HORSLEY: But policymakers in Washington have gone in precisely the opposite direction. Earlier this year, Congress boosted spending on both the military and domestic programs. And then there are the tax cuts, which the president bragged about at a campaign rally this week.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: We passed the biggest tax cuts and reform in American history - biggest cuts in history.

HORSLEY: In fact, these were not the biggest tax cuts ever. But they are cutting into government revenues despite repeated promises that the cuts would pay for themselves.

MAYA MACGUINEAS: Let me be a hundred percent clear about one thing. The tax cuts are never going to pay for themselves.

HORSLEY: Maya MacGuineas heads the Committee for a Responsible Federal Budget. She blames an outbreak of fiscal free-lunchism for the growing mountain of government debt.

MACGUINEAS: If you want to spend more, you have to pay more in taxes. And if you want to cut taxes, you have to be willing to cut spending, also. And right now, it seems to be this period where no politician is willing to do any of those.

HORSLEY: And like a family that's maxed out its credit cards, MacGuineas warns the government may have less room to maneuver the next time it's confronted with an actual crisis.

MACGUINEAS: Last time we had a recession, our debt was half the level it is today relative to the economy. And that meant we had a lot of fiscal tools to help respond. But as the debt gets higher, our ability to respond to a recession or another kind of crisis is definitely much more difficult.

HORSLEY: The growing deficit also means higher borrowing costs. So far this fiscal year, growth in Social Security, Medicare and defense spending have all been eclipsed by rising interest on the debt. Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.