Donald Trump’s fantasy-based fiscal policy is a disaster in the making
Konrad Yakabuski ([url]https://www.theglobeandmail.com/authors/konrad-yakabuski/[/url])
[url]https://www.theglobeandmail.com/opinion/article-donald-trumps-fantasy-based-fiscal-policy-is-a-disaster-in-the-making/[/url]
Of all the shady and self-congratulalory statements U.S. President Donald Trump delivered in his superlative-laced address to Congress, it is the one the fact-checkers largely ignored that deserved the most attention, considering its consequences for the global economy. In his record-long (another superlative!) speech before his audience of overexcited Republican and sulking Democratic lawmakers, Mr. Trump made an unexpected pledge to eliminate the US$1.9-trillion federal deficit before his second term ends in early 2029.
“In the near future, I want to do what has not been done in 24 years: balance the federal budget,” he said. “We are going to balance it.”
That was likely news to the Republicans in Congress currently drafting a budget for the next fiscal year, which begins in October. The GOP majority in the House of Representatives last week passed a budget resolution , with Mr. Trump’s backing, that forecasts deficits as far as the eye can see. And those forecasts include US$2-trillion in spending cuts that are likely to prove elusive as swing-district Republicans worry about their re-election in 2026.
The GOP budget resolution, which is essentially the opening bid in a months-long negotiation, also provides for up to US$4.5-trillion in tax cuts over 10 years. Most of that sum would go toward extending across-the-board tax cuts that Mr. Trump passed during his first term in office, but which are set to expire next year. The President has also vowed to cut taxes on tips, overtime and Social Security benefits and reduce the corporate tax rate to 15 per cent from 21 per cent for domestic manufacturers.
“The next phase of our plan to deliver the greatest economy in history is for this Congress to pass tax cuts for everybody,” Mr. Trump said in his Tuesday night speech.
Tellingly, the GOP budget resolution does not even mention tariffs as a potential source of revenue increases, despite Mr. Trump’s Tuesday night claim to raise “trillions and trillions” from levies on U.S. imports.
Cutting taxes without offsetting spending reductions would widen the U.S. budget deficit beyond its current 6.2 per cent of gross domestic product and send the federal debt spiralling past the 100-per-cent-of-GDP level. Indeed, even without an extension of the 2017 tax cuts, the federal debt-to-GDP ratio is on course to hit 118 per cent by 2035 according to the Congressional Budget Office. Extending the tax cuts would push it toward the 130-per-cent level. Those are frightening numbers that, sooner or later, would spook markets, threaten U.S. financial dominance and endanger global security. Financial historian Niall Ferguson recently noted that, throughout history, countries that spent more on debt service that on defence eventually ceased to be great powers. He cites Habsburg Spain and Bourbon France.
Last year, for the first time in almost a century, the U.S. government spent more on interest payments on the federal debt than on defence. And interest costs as a share of GDP are projected to be twice that of defence spending by 2035, according to CBO projections.
“The fact that the U.S. is currently projected to spend a rising share of its GDP on interest payments and a falling share on defence means that American power is much more fiscally constrained than most people realize,” Mr. Ferguson wrote in a recent essay.
This helps explain the pressure Mr. Trump keeps putting on NATO countries to step up their defence spending and assume more of the burden for policing the world. Each year, what are known as “mandatory” spending programs – Medicare, Social Security and Medicaid – are eating up a bigger chunk of the budget as the U.S. population ages. These programs, which account for more than 60 per cent of all spending, are the third rail of U.S. politics. Few politicians are willing to cut them so everything else, including defence, is getting squeezed. The Elon Musk-run Department of Government Efficiency is a sideshow that guts many worthy programs without saving much money.
Only a tiny minority of Republican lawmakers are now considered fiscal hawks. Though the GOP House resolution does propose unspecified cuts to Medicaid, they are unlikely to materialize. That is because the Trump coalition includes far more low-income voters who depend on programs such as Medicaid, which subsidizes health care for 72 million Americans, than it does billionaires.
“A lot of MAGAs are on Medicaid,” former Trump adviser Steve Bannon insisted (https:// recently. “You just can’t take a meat axe to it, although I would love to.”
As a presidential candidate in 2016, Mr. Trump insisted he could eliminate the federal debt within eight years. It has almost doubled since then. There is no path to a balanced U.S. budget that does not include higher taxes or cuts to entitlement programs, or a combination of both. Mr. Trump’s fantasy-based fiscal policy is a disaster in the making.
Konrad Yakabuski ([url]https://www.theglobeandmail.com/authors/konrad-yakabuski/[/url])
[url]https://www.theglobeandmail.com/opinion/article-donald-trumps-fantasy-based-fiscal-policy-is-a-disaster-in-the-making/[/url]
Of all the shady and self-congratulalory statements U.S. President Donald Trump delivered in his superlative-laced address to Congress, it is the one the fact-checkers largely ignored that deserved the most attention, considering its consequences for the global economy. In his record-long (another superlative!) speech before his audience of overexcited Republican and sulking Democratic lawmakers, Mr. Trump made an unexpected pledge to eliminate the US$1.9-trillion federal deficit before his second term ends in early 2029.
“In the near future, I want to do what has not been done in 24 years: balance the federal budget,” he said. “We are going to balance it.”
That was likely news to the Republicans in Congress currently drafting a budget for the next fiscal year, which begins in October. The GOP majority in the House of Representatives last week passed a budget resolution , with Mr. Trump’s backing, that forecasts deficits as far as the eye can see. And those forecasts include US$2-trillion in spending cuts that are likely to prove elusive as swing-district Republicans worry about their re-election in 2026.
The GOP budget resolution, which is essentially the opening bid in a months-long negotiation, also provides for up to US$4.5-trillion in tax cuts over 10 years. Most of that sum would go toward extending across-the-board tax cuts that Mr. Trump passed during his first term in office, but which are set to expire next year. The President has also vowed to cut taxes on tips, overtime and Social Security benefits and reduce the corporate tax rate to 15 per cent from 21 per cent for domestic manufacturers.
“The next phase of our plan to deliver the greatest economy in history is for this Congress to pass tax cuts for everybody,” Mr. Trump said in his Tuesday night speech.
Tellingly, the GOP budget resolution does not even mention tariffs as a potential source of revenue increases, despite Mr. Trump’s Tuesday night claim to raise “trillions and trillions” from levies on U.S. imports.
Cutting taxes without offsetting spending reductions would widen the U.S. budget deficit beyond its current 6.2 per cent of gross domestic product and send the federal debt spiralling past the 100-per-cent-of-GDP level. Indeed, even without an extension of the 2017 tax cuts, the federal debt-to-GDP ratio is on course to hit 118 per cent by 2035 according to the Congressional Budget Office. Extending the tax cuts would push it toward the 130-per-cent level. Those are frightening numbers that, sooner or later, would spook markets, threaten U.S. financial dominance and endanger global security. Financial historian Niall Ferguson recently noted that, throughout history, countries that spent more on debt service that on defence eventually ceased to be great powers. He cites Habsburg Spain and Bourbon France.
Last year, for the first time in almost a century, the U.S. government spent more on interest payments on the federal debt than on defence. And interest costs as a share of GDP are projected to be twice that of defence spending by 2035, according to CBO projections.
“The fact that the U.S. is currently projected to spend a rising share of its GDP on interest payments and a falling share on defence means that American power is much more fiscally constrained than most people realize,” Mr. Ferguson wrote in a recent essay.
This helps explain the pressure Mr. Trump keeps putting on NATO countries to step up their defence spending and assume more of the burden for policing the world. Each year, what are known as “mandatory” spending programs – Medicare, Social Security and Medicaid – are eating up a bigger chunk of the budget as the U.S. population ages. These programs, which account for more than 60 per cent of all spending, are the third rail of U.S. politics. Few politicians are willing to cut them so everything else, including defence, is getting squeezed. The Elon Musk-run Department of Government Efficiency is a sideshow that guts many worthy programs without saving much money.
Only a tiny minority of Republican lawmakers are now considered fiscal hawks. Though the GOP House resolution does propose unspecified cuts to Medicaid, they are unlikely to materialize. That is because the Trump coalition includes far more low-income voters who depend on programs such as Medicaid, which subsidizes health care for 72 million Americans, than it does billionaires.
“A lot of MAGAs are on Medicaid,” former Trump adviser Steve Bannon insisted (https:// recently. “You just can’t take a meat axe to it, although I would love to.”
As a presidential candidate in 2016, Mr. Trump insisted he could eliminate the federal debt within eight years. It has almost doubled since then. There is no path to a balanced U.S. budget that does not include higher taxes or cuts to entitlement programs, or a combination of both. Mr. Trump’s fantasy-based fiscal policy is a disaster in the making.
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