• Five reasons why $1 trillion deficits may not be far away for Uncle Sam

    By: Jamie Dupree

    Updated:

    It wasn’t that long ago that Republicans denounced four consecutive yearly deficits of over $1 trillion during the Obama Administration, but now that the GOP is fully in charge of the White House and Congress, it’s possible the deficit may be heading back into the territory of that very large figure.

    The federal deficit in 2017 was $666 billion; the Congressional Budget Office estimates it will be $699 billion in 2018, and after the first three months of the fiscal year, the deficit is running higher than a year ago at this time.

    Let’s look at some of the reasons why the deficit might be going up – not only this year – but in the future as well.

    1. 2018 deficit running slightly ahead of 2017. As mentioned above, the CBO projects a deficit this year of $699 billion; already in the first three months of this fiscal year, Uncle Sam has run up $25 billion more in red ink than a year earlier. The numbers in December 2017 were actually a couple of billion better than a year earlier, as more tax revenues came in last month. So far, in the first three months of Fiscal Year 2018, record revenues from individual income taxes have come into Uncle Sam, $390.8 billion. That seems to be a good indicator of economic strength.  But will those revenues continue to climb in the rest of 2018?  And what about spending?

    2. Tax cuts may reduce revenues in 2018. I can hear people gritting their teeth already. They don’t believe the CBO estimates, and they don’t believe that the tax cuts signed into law at the end of 2017 will lead to a drop in revenues. They will yell, “Static scoring!” on my Twitter time line. But if you look back in history, a tax cut doesn’t always translate immediately into more revenues. In 1981, when President Ronald Reagan pushed tax cuts through Congress, the feds took in $599.2 billion in revenues. By 1983, the figure was basically unchanged at $600.5 billion. The same type of thing happened with the Bush tax cuts of 2001 and 2003. In 2001, revenues were $1.99 trillion. They dropped to $1.85 trillion in 2002, down to $1.78 trillion in 2003, and went up to $1.8 trillion in 2004. Finally in 2005, revenues went above the levels from 2000. If history repeats itself with the Trump tax cuts, there could be a revenue drop this year, which would mean a higher budget deficit in 2018.

    3. Spending deal expected to add more to deficit. President Trump has made clear he wants $54 billion more in defense spending for both 2018 and 2019 – Democrats say, okay, then add the same amount of money for non-defense spending. While Republicans don’t want to do that, the GOP doesn’t have 60 votes in the Senate, so there will have to be a budget deal to set the limits on spending going forward. If you are going to have parity, or something close to it, then that means a big chunk of extra spending, as much as $100 billion in 2018 and $100 billion more in 2019. If you hear about a deal in Congress on the ‘budget caps,’ this is what they are talking about.  And when you add in another $100 billion, that’s more red ink.

    4. Disaster aid will add more to the deficit. After three major hurricanes – Harvey, Irma and Maria – and a devastating wildfire season out West, the Congress has already approved $53 billion in disaster relief, and much more is likely to be spent. Texas, Florida, and Puerto Rico have all staked a claim for large amounts of money, and in coming weeks, lawmakers could approve another $80 billion or more – and even more money will be needed after that. It wouldn’t surprise me to see the aid figure go over $200 billion, and maybe even higher in 2018. The White House asked for $44 billion in December – the House passed a bill with $81 billion, and that could jump more in coming weeks and months.  The Senate has to act on that disaster aid next.

    5. What you’re not hearing about – budget cuts. For all the talk from Republicans and President Trump about cutting federal spending, there is little likelihood that Congress will come through with budget savings to offset new spending in 2018. When the President asked for $44 billion in new hurricane disaster relief late last year, that spending was offset by $44 billion in budget savings proposed by the White House – except those savings wouldn’t happen until 2025-2027. The House tried to get $200 billion in savings from mandatory spending programs over ten years – $20 billion per year – but Senate Republicans refused to agree to that. It’s easy to talk budget cuts, but much more difficult to pass them.  And when you don’t offset extra spending, the deficit goes up.

    So, let’s recap.

    The CBO estimate for the budget deficit in 2018 is $699 billion, so we’ll call it $700 billion.

    If there is a budget caps deal, it would probably add about $100 billion in spending for this year. That’s a deficit of $800 billion.

    If there is $200 billion spent on hurricane and other disaster relief, then you are already bumping up against a $1 trillion deficit.

    And if the new tax cuts mean stable or lower revenues in 2018 for Uncle Sam – which has happened with the last three major tax cuts in 1981, 2001 and 2003 – that could push the yearly deficit even higher.

    Don’t take my word for it – the Committee for a Responsible Federal Budget recently said, “failure to offset disaster funding, along with the lack of sufficient offsets for tax reform and a potential budget caps deal, is likely to lead to the return of trillion dollar deficits by next fiscal year.”

    You’ve been warned.

    Don’t be surprised if it happens.

     

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