The White House budget reflects wishful thinking on fiscal balance

The budget plan that President Trump released Tuesday morning promises a bright fiscal future, with the federal budget reaching balance in 2027. That would be quite a feat because the budget has been balanced in only four of the last 48 years.

It almost sounds too good to be true. Unfortunately, it is. The administration’s plan relies on three unrealistic assumptions to produce the mirage of a balanced budget.

{mosads}First, the plan assumes trillions of dollars of unspecified revenue-raising measures. It shows no reduction in federal revenue, even though the administration issued an outline last month promising sweeping tax cuts. The plan says that the large tax cuts are still on, but that the resulting revenue loss will be offset by other measures yet to be identified.

Second, the plan relies on massive unspecified reductions in nondefense discretionary programs. Those programs, which are now 3.2 percent of the economy (lower than during most of Ronald Reagan’s presidency), would ostensibly shrink to 1.4 percent of the economy in 2027. Unfortunately, the plan’s specific spending cuts, some of which have merit, fall far short of yielding the envisioned savings.

To fill the gap, the administration turns to a “2-Penny Plan,” which decrees by fiat that total spending authority for nondefense discretionary programs will fall by 2 percent per year throughout the upcoming decade. The plan also assumes that the federal government can spearhead $1 trillion of infrastructure spending while paying only one-fifth of the total cost.

Third, the plan counts on a rapid and sustained pickup in economic growth. It envisions a 2027 economy roughly 10 percent larger than other forecasters’ corresponding estimates. Although sound economic policy can spur growth, even the most far-reaching structural reforms would be unlikely to quickly boost output by 10 percent. The budget plan and the administration’s other economic policies clearly cannot attain that ambitious goal. Indeed, the president’s vocal opposition to free trade threatens to impede growth, both at home and abroad.

Without its unrealistic assumptions, the administration’s plan wouldn’t balance the budget in 2027 — or ever. By itself, that’s not a problem. Nobody else has a realistic plan to balance the budget, and full balance isn’t necessary. Our first goal should be a more modest one. We need to halt the runaway debt buildup that is slated to occur under current law as spending on Social Security, Medicare, Medicaid, and health insurance subsidies rises faster than revenue. Dreams of budget balance should be put on hold until this more urgent goal has been achieved.

Unfortunately, the administration’s plan doesn’t take the steps necessary to reach that goal. It doesn’t raise revenue. It also doesn’t cut Social Security retirement benefits or Medicare, although it makes modest cuts to Social Security disability benefits. To be sure, the plan is more aggressive when it comes to Medicaid and health insurance subsidies. It includes the cuts that the House passed three weeks ago and adds another $600 billion of Medicaid cuts over the upcoming decade.

That’s not the best approach. By focusing on Medicaid, the plan targets the program serving the most disadvantaged recipients for the most severe cuts. And cutting Medicaid while ignoring Social Security, Medicare, and revenue is not a viable strategy to correct the fiscal imbalance.

It shouldn’t be surprising that the plan does so little to restrain entitlement spending. White House budget director Mick Mulvaney reminded reporters Monday afternoon that the president promised during the campaign that he wouldn’t cut Social Security, Medicare, and Medicaid. He reaffirmed the president’s intention to keep his promise with respect to the first two programs.

The administration’s budget plan reflects wishful thinking, not a serious effort to address the long-run fiscal imbalance.

Alan D. Viard is a resident scholar at the American Enterprise Institute, where he studies federal tax and budget policy. He previously served as a senior economist at the Federal Reserve Bank of Dallas and taught economics at Ohio State University. He has been a visiting scholar at the U.S. Department of the Treasury’s Office of Tax Analysis, a senior economist at the White House’s Council of Economic Advisers, and an economist at the Joint Committee on Taxation of the U.S. Congress.

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