Trump's budget only works 'if you believe in tooth fairies'
Moving past the headline numbers — $1.7 trillion in spending cuts, massive reduction in the long-term for social safety net programs, and increased defense spending — many economists and political analysts observed that the most striking part of the Trump budget is just how many assumptions it makes.
A huge, sustained growth in GDP, a double count of benefits from tax reform, and some rosy line items are just a few of the problems with the Trump administration's opening gambit in the budget debate.
Rosy economic growth
One of the biggest assumptions the Trump budget makes is that US GDP growth will hit 3% — and stay there.
Mick Mulvaney, the director of the Office of Management and Budget, told reporters Monday that such an assumption would not be out of reach, pointing to the long-term growth rate of the American economy since World War II.
From Mulvaney's comments (emphasis added):
"That's what you can do with 3% economic growth. That's a dynamism that used to be normal in the American economy. And that's what we're trying to get back to, and that's what this budget is part and parcel of. It drives our tax reform policy, our regulatory policy, trade, energy, welfare, infrastructure, and our government's spending priorities. Everything is keyed to getting us back to 3%."
But such a sustained, 3% projection is much lower than forecasts from the Congressional Budget Office, the Federal Reserve, the International Monetary Fund, and others. Additionally, many economists shrugged off the idea.
Former Treasury Secretary Larry Summers, in a Washington Post column on Tuesday, said that the idea was a "logical error of the kind that would justify failing a student in an introductory economics course."
"Apparently, the budget forecasts that U.S. economic growth will rise to 3.0 percent because of the administration's policies — largely its tax cuts and perhaps also its regulatory policies," Summer wrote. "Fair enough if you believe in tooth fairies and ludicrous supply-side economics."
Chris Krueger of the Cowen Washington Research Group similarly dismissed the assumption.
"There is some federal budgeting wizardry and economic tomfoolery in the projections included in the budget — which assumes the AHCA is law," Krueger wrote in a note to clients on Monday. "It also assumes 3% GDP growth and that the budget will 'balance' over 10 years."
The last time the US economic growth was above 3% in a year was in 2005. The country has not had two consecutive years of GDP growth of more than 3% since 1999 and 2000, in the midst of the tech bubble. Mulvaney said annual GDP growth since 1948 has been 3.2%. But the average is 2.6% since 1980.
Other complications toward the 3% assumption include the Federal Reserve hiking interest rates, labor productivity remaining low, and structural factors such as an aging population, which all amount to headwinds toward economic growth.
Double counting tax cuts
The Trump administration says the 3% GDP growth will also help to balance the federal budget over the next 10 years. But that conflicts with statements the Trump campaign has made about its plan for tax reform.
The Trump administration has argued that its tax cut plan would be revenue neutral because of the resulting economic growth. It has also argued that the economic growth from tax cuts would help balance the budget.
Put another way, say all current taxes and outlays are set at a baseline of $0. Trump's tax cuts, the administration says, would nominally decrease revenue and bring the deficit from the baseline to -$100. Based on the White House's statements after the tax plan was released, they would argue the growth from the tax cuts would get the US back to $0.
The administration is saying the tax cuts will not only pay for themselves, but also earn the country enough to make up the deficit. Essentially, what they billed as a revenue-neutral tax plan will now evidently be revenue positive.
As Summers put it this math does not work "in a world of logic."
"This is a mistake no serious business person would make," Summers said. "It appears to be the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them."
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, also took issue with the apparent double-counting in a statement Monday.
"The budget also uses the entirety of the dynamic revenue from growth to pay down the debt – a move that we support but that is inconsistent with their past statements that economic growth would help pay for tax reform," MacGuineas said. "The same money cannot be used twice."
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