GOP Silence on Deficits Under Trump Marks Turnabout for Party
(Bloomberg) -- President Donald Trump’s budget blueprint doubles the deficits he forecast a year ago with little expectation they’ll shrink anytime soon.
As a result, the $20 trillion federal debt that Trump railed against as a candidate is projected to balloon to $30 trillion a decade from now. And that’s despite the healthy dose of economic optimism in Monday’s budget: 3 percent growth, low inflation, low interest rates and low unemployment each year. It also assumes trillions in spending cuts Congress has already rejected.
Even before Congress passed and Trump signed an expansive spending deal last week, financial markets began taking notice. The prospect of encroaching inflation and higher interest rates contributed to the biggest stock market rout in two years. Investors who spent January celebrating Trump’s tax package with the biggest rally since 1997 watched as those gains dissolved, leaving the S&P 500 back where it was in November.
“Congress is willing to spend like crazy, and that was part of why we sold off last week,” said Ian Winer, director of equities at Wedbush Securities Inc. “People are finally starting to say, where is all this money coming from?”
Even Trump’s budget chief, Mick Mulvaney, a member of the conservative Freedom Caucus when he was in Congress, acknowledged that red ink exceeding $1 trillion a year could cause interest rates to “spike.” He said if he were still a member of Congress he probably would have voted against the two-year budget agreement signed by his boss last week that will raise federal spending by almost $400 billion above current levels.
But most of his former congressional colleagues did vote for the deal with Trump’s support. It’s a striking turnabout on deficits, given that Mulvaney and his fellow Republicans seven years ago brought the U.S. to the brink of defaulting on its debt to force an agreement from President Barack Obama, a Democrat, to slash spending.
Now that Republicans control the House, Senate and the White House, they’re facing the much harder task of governing. The result so far has been partisan tax cuts and bipartisan spending increases.
In the Senate, the spending-and-debt deal breezed through with 71 votes, with even some of the chamber’s most conservative members, like Ted Cruz of hurricane-ravaged Texas, voting for it even though he said it was "foolhardy" to increase the deficit. It passed 240-186 in the House.
Republican Senator Rand Paul of Kentucky waged a lonely filibuster accusing his party of hypocrisy after it railed against deficits under Obama. Other Republicans decried the legislation as a budget buster. But there was no escaping that their party, which long promised to rein in deficits, is now set to preside over an historic increase in red ink.
Mike Bailey, director of research at FBB Capital Partners in Bethesda, Maryland, said buyers of U.S. debt could be “spooked” if they see Congress repeatedly spending money "like a sailor."
“All of a sudden if the U.S. finances are a bit shakier, maybe they’re going to say, you know what, we need a better return,” he said.
Prospects for any bipartisan grand bargain to tackle deficits have dimmed to near zero, especially before November’s midterm elections. Democrats are in no mood for a deal trimming entitlements -- one of the biggest deficit drivers -- or enact spending cuts to other domestic programs after Republicans passed a tax cut package that is forecast to add more than $1 trillion to budget shortfalls over a decade.
And Republican leaders appear likely to forego any major election-year attempt to restrain entitlements like Medicare and Medicaid on their own -- a process that would require them to face a possible repeat of last year’s grueling, failed efforts to repeal and replace the Affordable Care Act.
With the administration’s proposed budget obsolete before it was printed, Mulvaney sent a letter to Congress urging restraint. That admonition is certain to fall on deaf ears as appropriators in both parties, given higher spending limits that were part of the budget deal, write a massive omnibus government funding bill by their self-imposed March 23 deadline.
Congress did enact a fig leaf of fiscal responsibility: lawmakers agreed to set up a committee that by the end of the year is supposed to issue recommendations to repair a budget process that’s kept the federal government operating on a series of stopgap funding measures. Previous such efforts have ended up without a resolution, and bipartisan majorities in Congress have routinely tossed aside caps and other mechanisms intended to curb spending.
In the long run, the rising tide of red ink could start to crimp Trump’s flexibility in the event of a crisis or a recession as well as those of his successors, analysts warn.
“Should there be a downturn, there’s not a lot of fiscal space,” said Gennadiy Goldberg, a strategist at TD Securities. “If you get this massive surge in financing needs, you could have a lot more pressure on rates in the next couple of years.”
The Committee for a Responsible Federal Budget, a non-partisan anti-deficit group, has projected red ink will hit $1.2 trillion next year, and stay above $1 trillion after that for years to come.
Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp., said the end result could be faster rate hikes.
"You’re adding on debt to an economy that’s going pretty good," Selkin said. "That has the potential to mess things up."
Trump, meanwhile, has been emphasizing his new spending plans and regulatory flexibility as much as his proposed cuts. That includes a $200 billion infrastructure package delivered Monday, which was widely panned by Democrats as too small and geared toward private interests.
More immediately, Congress will debate spending as much as $25 billion on Trump’s proposed wall on the Mexican border and other border security items as part of deal to provide a path to citizenship for as many as 1.8 million people brought to America illegally as children. While Trump promised Mexico would pay for the wall, at least for now it’s likely to be paid for like nearly everything else these days: with more borrowing.
©2018 Bloomberg L.P.