Trump's Path to a Balanced Budget Paved With Accounting Gimmicks
(Bloomberg) -- Presidents have long used creative math and budget gimmicks to create the illusion that the trillions of dollars in spending they propose will somehow wind up reducing the deficit. Donald Trump’s $4.1 trillion budget is especially ambitious: It combines many of the tricks his predecessors tried over the years, and adds a few of his own.
The White House said Trump’s request for fiscal 2018 would generate a fiscal surplus by 2027 after $3.6 trillion in spending reductions and $2.1 trillion in economic growth-induced revenue increases.
Those conclusions rely on phantom tax increases, unachievable spending cuts and unrealistic growth assumptions to avoid making hard choices that would be needed to get anywhere near a balanced budget.
Here’s how Trump’s team got the numbers to look like they add up:
No Tax Details
The administration’s biggest accounting sleight of hand is its failure to explain how Trump’s corporate and individual tax-rate cuts pay for themselves. The administration says it will reduce corporate tax rates to 15 percent and lower the top individual rate to 35 percent, but it doesn’t say what loopholes and deductions it would end to offset the revenue loss.
The independent Tax Policy Center estimated that Trump’s campaign tax plan would add $7.2 trillion to the deficit, while the nonpartisan Committee for a Responsible Federal Government put the cost at $5.5 trillion. The budget says the plan wouldn’t add a penny to the deficit, but it offers no detail.
David Stockman, former President Ronald Reagan’s budget director, said on his blog that since Trump has taken major tax deductions like mortgage interest and charitable giving off the table, the assumption that deep rate cuts will be offset isn’t justified.
"There are probably not enough politically achievable loopholes closers to fund even a 30 percent corporate and business tax rate," he wrote. "And even that would leave no room at all for personal tax cuts."
Steve Bell, who as Senate Budget Committee staff director helped consider Reagan’s first budget, recalled that Reagan in 1981 used a tax overhaul accounting move that may have been even bigger: a footnote promising "future savings to be identified," he said.
White House budget director Mick Mulvaney defended the Trump budget maneuver, saying that counting the tax plan as revenue-neutral "was the most reasonable option we had."
Treasury Secretary Steve Mnuchin pledged to be transparent about the Trump tax plan, eventually.
"We felt it was premature to put in any changes to the budget as a result of taxes since we are not far enough along to estimate what that impact will be," he said at an event sponsored by the Peter G. Peterson Foundation, which says it seeks long-term government fiscal solutions. Mnuchin said the cost of the tax cut won’t be "anything like $4 trillion or $5 trillion" and noted that the administration has proposed ending the state and local tax deduction for individuals.
The Trump budget is able to claim $2 trillion in additional revenue over the next decade because it forecasts real gross domestic product growth jumping to 3 percent by 2021 and staying at that level for years. Senate Budget Committee Republicans pointed out in their own analysis that this is above the 1.9 percent average growth that the Congressional Budget Office projects.
"An aging population and falling productivity make 3 percent growth very unlikely, as history and basic economics teaches us," Bell said.
Asked about criticism that the administration was cooking the books, Mulvaney said Tuesday that early Obama administration budgets projected rapid economic growth that never materialized.
In his 2012 budget request for example, President Barack Obama projected growth would jump from 2.7 percent in 2011 to 4.4 percent in 2013 and remain above 3 percent through 2016. Those numbers never materialized.
"Every presidential budget is aggressive and I don’t know that this is qualitatively different," Doug Holtz-Eakin, a former Republican-appointed Congressional Budget Office director, said of the Trump growth assumptions.
Even so, the nonpartisan Committee for a Responsible Federal Budget estimated that using the CBO’s growth assumptions, the budget would produce a $625 billion deficit in 2027. If the administration needs to rely on economic growth to make its tax plan pay for itself, then the deficit would be $1.1 trillion that year.
Trump has promised to rebuild the U.S. military through a spike in spending. He’s also pledged to build a border wall that could cost tens of billions of dollars, a spending increase that isn’t reflected in the budget.
The regular defense spending caps would rise by $489 billion over 10 years in the budget, but the budget is taking credit for cutting projected war funding from $70 billion in 2017 to $10 billion in 2027, an accounting trick that appears to erase the cap increase.
Overall, the budget claims nearly $600 billion in savings from paring back war funding, a gimmick that the Obama administration also used.
The administration budget expects the repeal and replacement of Obamacare to produce $250 billion in deficit savings over a decade, far more than the $150 billion the Congressional Budget Office estimated for an earlier version of the GOP health bill that narrowly passed the House earlier this month.
A final CBO score for the House-passed bill, which will reflect last-minute changes, is scheduled to be released Wednesday and is expected to show even lower budget savings.
Senate Republicans have shown deep unease with the Medicaid cuts in the House-passed Obamacare repeal bill. The budget claims that Trump can convince Congress to cut Medicaid by an additional $610 billion.
By contrast, Trump’s budget doesn’t even try to cut some of the government’s largest -- and most popular -- programs, like Social Security and Medicare.
"Anytime you project a balanced budget and keep Social Security and Medicare off the books, you have a credibility problem," said Holtz-Eakin.
Trump’s plan for a 40 percent reduction in non-defense discretionary spending by 2027 is also very unlikely. That would require sustained, deep spending cuts to nearly domestic agency of the government -- and Congress already rejected all of Trump’s proposed cuts for fiscal 2017 when it passed an omnibus spending bill earlier this month.
It would take those accounts to just 1.7 percent of GDP, a level not seen in decades.
Democrats have insisted that any bipartisan spending deal won’t include significant domestic spending cuts.
Senate Majority Leader Mitch McConnell of Kentucky said Tuesday he expects to start negotiations with Democrats soon on a new spending cap soon.
"We’ll have to negotiate the top-line with Senate Democrats" he said.
Trump has sought to negotiate with Democrats on infrastructure spending and touted a $1 trillion investment. The budget makes clear that he only intends to spend $200 billion as part of that plan, relying on private investors to pony up the rest. But the budget elsewhere anticipates $95 billion in savings from cutting highway funding.