The Hill (Op-Ed)
By Jack Salmon
May 24, 2017
Tuesday, the president revealed his proposed budget for the 2018 fiscal year — “A New Foundation For American Greatness.” Commentators have discussed the details of the proposed budget, with headlines claiming that the budget is severely austere, claiming the budget helps us avert fiscal calamity, or simply picking up on the egregious accounting error in the revenue calculations.
The government proposes to reduce federal spending by $3.6 trillion over the next decade. When combined with the anticipated economic gains that will result from the president’s fiscal, economic and regulatory policies, the deficit is estimated to be reduced by $5.6 trillion and balanced by 2027.
If the federal budget is set on this trajectory, then publicly-held debt is predicted to fall to below 60 percent of GDP within the decade, setting the budget on a more fiscally sustainable path. Moreover, a smaller debt to service also gives the federal government a more flexible budget.
Some Fiscal Responsibility
Following through on his election pledge, the budget includes the repeal and replacement of the Affordable Care Act with $250 billion in savings associated with healthcare reform. The proposal also partially devolves Medicaid spending to the states through block grants and per capita caps, which is projected to save an additional $610 billion over 10 years.
There were some fairly comprehensive reforms proposed to welfare entitlements, including tightened eligibility to the Supplemental Nutrition Assistance Program (SNAP). Participation in SNAP peaked during the recession. Since then, the economy has recovered and unemployment is at record lows, yet SNAP participation remains persistently high.
One proposed reform in the budget that I have stressed the need for in past op-eds is to alter disability insurance programs to promote greater labor force participation. Reforming the welfare system in a way that encourages people to move back into work is an obvious solution for labor force growth. The current system is too complex and is lacking sufficient incentives to encourage people on welfare to start paid work or increase their hours.
In particular, the Social Security Disability Insurance Program has seen a drastic increase in beneficiaries in recent years. With less than 2 million beneficiaries claiming SSDI in 1970 and more than 10 million beneficiaries in 2015, almost the entirety of growth in beneficiaries is from disabled workers.
Military and Security Largesse
One area of the budget in which the president does not show any sign of fiscal responsibility is in military and security spending. With an eye-watering $54 billion proposed increase in defense spending in 2018 alone, the president would do well to realize that ‘the national debt’ is the biggest security threat we face.
In addition, billions more have been pledged to finance the hiring of new immigration personnel, as well as the funding of the infamous border wall. There are serious security threats in the world, but when you consider that the United States already spends more than the next eight countries combined, you start to wonder why the military industrial complex is exempt from any form of fiscal restraint.
Positive Moves on Tax Reform
The budget goes some way in simplifying the tax code. The basic pillars of an ideal tax code include a revenue system that is simple, equitable, efficient and predictable.
The tax reforms in the budget pledge to lower individual rates, repeal the Obamacare surcharge, abolish the death tax, reduce business tax and eliminate special interest tax breaks. All of these reforms go some way in reducing the burden on individuals and businesses.
Regulation — by distorting the investment choices that lead to innovation, has created a considerable drag on the economy amounting to a reduction in GDP growth in recent years. Combined with promises to reduce the financial regulatory burden, this tax reform agenda should go some way in promoting growth in the economy in the coming years.
Rosy Growth Assumptions
One of the biggest and most optimistic assumptions the president’s budget proposal makes is that GDP growth will reach 3 percent and stay there. The sustained 3-percent projection is much higher than Congressional Budget Office, Federal Reserve and International Monetary Fund projections. With a projected growth rate of 1.9 percent, low productivity and an aging population; even with these growth inducing reforms, 3 percent is still a rosy assumption to make.
In all, the president’s budget goes some way in promoting a more fiscally-sustainable budget than the baseline projection, as well as making some headway on comprehensive tax reform. However, defense spending continues to grow exponentially, social security remains on autopilot and the assumptions being made about growth projections lead me to believe that it is unlikely the budget will be balanced within the next decade.
Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London.
The views expressed by contributors are their own and not the views of The Hill.
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